Although you don’t need to be an accountant to be a small business owner, your business will have a much better chance to survive and thrive in this challenging business world if you have the basic accounting skills to analyze your business results.
If you are unable to interpret your financial information, you will have no idea what is working and what is not. As a small business owner, at least, you should have knowledge of the three basic financial statements: Balance Sheet, Income Statement (Profit and Loss Statement), and Cash Flow Statement.
The balance sheet represents a snapshot of your business’ assets, liabilities, and shareholders’ equity at a specific point in time. It gives you an idea as to what the business owns and owes, as well as the amount invested by the owners.
The income statement (Profit and Loss statement) shows revenues, expenses, gains, and losses during a specific period. It tells you the profitability of your business in that particular period. The income statement is sometimes referred to as the profit and loss statement (P&L), statement of operations, or statement of income.
The cash flow statement shows the amount of cash generated and used by your business in a given period. It answers the question “Where did the money go?” Although cash flow is crucial to the business’ survival, cash flow statement is often misunderstood and neglected by small business owners.