If you are like many business owners, you may find it challenging to prepare and understand financial statements. Running a business comes with numerous responsibilities, which is why it can sometimes be challenging for business owners to pay attention to every detail, especially bookkeeping. That’s where a small business bookkeeper comes in to help you create financial statements accurately to avoid errors.
Bookkeeping is an important activity that many of us are unable to perform due to a lack of knowledge and time. That’s why it’s always recommended to seek help from a professional bookkeeper. However, as a business owner, there are financial reports that you must review to ensure the accuracy and improved financial performance of your business.
Having enough knowledge and information about your past, present, and future financial condition will help you as a business owner and allow you to make the right business decisions. Knowing the numbers will allow you to evaluate and improve business performance, reduce your risk and make an effective and realistic plan for business growth. To protect your business’s financial condition, you must understand and daily review financial statements.
How Do You Know the Financial Health of Your Business with Financial Statements?
Profit and Loss Statement
You can monitor business activity using a profit and loss statement. As a business owner, it is where your company is making money and where it may be losing. For investors, it shows the financial condition of a company before they decide to invest, or to see what return they are getting on their current investment. If you find it difficult to understand profit and loss statements or how to calculate complex statements, you can choose bookkeeping in Melbourne for your business.
Your profit and loss statement is divided into 2 sections:
- Revenue: It is an income from your primary business activity, secondary activities, like bank interest, and any other financial gains, like profit on the sale of assets.
- Expenses: What you are spending on primary activities, secondary activities, and any other losses during the period.
Balance Sheet
A balance sheet, also called a statement of financial position, is a summary of all your business liabilities (what your business owes) and assets (what your business owns). At any point in time, it shows you how much money you would have left once all your assets are sold and all your debts are paid off. This is also called owner’s equity. The balance sheet is divided into three sections:
Owner’s equity = Assets – Liabilities
It is known as a balance sheet because, at any specific moment, each side of this equation must balance out.
Cash Flow Statement
A cash flow statement shows how much cash moves in and out of your business over a period of time. This shows the liquidity of your company. Having sufficient cash is an important part of business planning to pay your debts, but also assets and materials. A cash flow statement will tell you if you have any issues in this area. Cash flowing in means the money you receive from sales, but it may also be from:
- Debt repayments
- Selling unnecessary assets
- Rebates
- Grants
Your outgoing cash includes expenses, such as:
- Payments to suppliers
- Super and wages
- Bills
- Maintenance
- Other business expenses.
Importance of Financial Statements
You can make informed business decisions if you have accurate financial statements and understand your company’s financial health.
- Financial statements will help you pay attention to profitability, equity, and cash flow.
- Tax authorities rely on financial statements to determine how much tax your business owes. By working with experienced accountants Melbourne and understanding your statements, you can feel confident that you’re meeting reporting requirements and complying with tax laws.
- Updated financial statements help you track the performance of a business over a specific time period.
Conclusion
Your financial statements are key to understanding your business’s health and performance. Regularly reviewing them helps you make informed decisions, stay compliant, and plan for growth. If managing them feels overwhelming, opting for reliable bookkeeping services would be a great decision to ensure accuracy and clarity.