UNDERSTANDING FINANCIAL STATEMENTS
With so many things to juggle in a small business, it is all too easy to be immersed in your day-to-day operations and neglect the big picture. As you plan for one year, five years, or even a decade from now, it is important to keep up with your finances.
Most small business owners are not accountants. And many small businesses don’t know which product or service makes the most profit. As a small business owner, it is crucial to understand your financials so you’re aware of how your business is doing at any given time.
At a high level, your financials refer to reports and statements that offer insights into the financial health of your small business. In this guide, we will cover the Income Statement, Balance Sheet, and Cash Flow Statement.
What is an Income Statement? A business’s performance is reflected in the Income Statement, also known as a profit and loss (P&L) statement. The statement includes business income, operating costs, and expenses used to calculate total business profit or loss for a specified financial period.
P&L statements help you manage your business better and keep your financials on track. A monthly statement monitors the performance of your business against stated projections—reflecting a profit, loss, or break-even situation. If the P&L identifies problems, you will have a chance to correct them before anything gets out of hand.
What is a Balance Sheet? While producing positive net income is a critical first step, it doesn’t tell the full story. The Balance Sheet sometimes referred to as a statement of financial position, essentially identifies your company’s net worth.
On a Balance Sheet, you will list out what your business owns (assets) and how much it owes(liabilities) to determine your Return on Assets (ROA). Your ROA is a key indicator of your company’s ability to generate future revenues.
What is a Cash Flow Statement? To have enough cash available to run the day-to-day business operations and cover any unexpected expenses, you will need to forecast and plan for cash coming in and going out of your business as accurately as possible.
The Cash Flow Statement summarizes the amount of cash your business takes in, the sources of cash, the amount of cash that goes out, and how cash is used. Think of the Cash Flow Statement as the bridge between the Income Statement and the Balance Sheet.
In addition to these three main financial statements, other reports – such as a sales report or accounts receivable aging report – can add tremendous value and help you better understand the financial health of your business. It’s important to have accurate and timely financial statements that are customized to suit your business so you can spot problems early and enhance your decision-making.
Our software will help you easily create reports, view your finances, process VAT and international payments, stay up-to-date on the latest financial legislation, and much more. Click to learn more. Free DEMO available.
Benefits of Accounting Software vs Spreadsheets
It is not uncommon for small business owners to start tracking their business finances with a spreadsheet. Or perhaps more accurately, a series of spreadsheets.
However, as your finances become more complex, you’ll quickly discover spreadsheets don’t grow well with your business. In a spreadsheet, every financial transaction, such as a payment arriving in your bank account, must be manually updated. This not only takes up time, it also increases the likelihood of data errors. Manual data entry also means you lack a real-time view of your business finances.
Fortunately, you can mitigate these challenges by automating your finances with accounting software like Sage 50cloud Accounting. Here are some key benefits to using accounting software in your business.
1. Simple to use and get started If you can use a spreadsheet you can use accounting software. Modern small business accounting software is quick to set up and offers a user-friendly design. Accounting software is more than just a tool to record transactions, it lets you visually see how much money is coming in and out of your business each month with automated dashboards. In addition, with accounting software like Sage 50cloud Accounting, you can generate your financial statements with a few easy clicks.
2. Save time with automation Accounting software lets you reduce the time you spend on paperwork by automating common accounting tasks. You can connect to your bank account, for example, so incoming payments can be matched to invoices in minutes. You can also save time by setting up your invoices to recur automatically.
3. Get paid faster Speaking of invoices, approximately 30% of small businesses experience problems from past due invoices, resulting in businesses spending an average of 130 hours chasing late payments1. That’s valuable time you could be spending on growing your business.
Accounting software helps you speed up your invoicing process by enabling you to create, edit, send, and track your invoices. Your customers can even pay you online, directly from a “Pay now” button.
4. Cloud-connected software Not ready to commit to input your data with a cloud-based solution? Sage 50cloud Accounting installs onto your desktop or laptop computer and all of your data is saved to your hard drive.
With cloud-connected features like Bank Feeds and Invoice Payments, you still get the benefit of connecting to the cloud with all of the reliability of on-premise software.
5. Conquer year-end As a small business owner, it’s likely the two times of year that you will talk to your accountant or bookkeeper the most are tax season and year-end.
Using accounting software helps to ensure all your invoices, receipts, and statements are neatly filed and easily accessible to your accountant or bookkeeper.
Ready to automate your small business finances with Sage? Discover the solutions that will help you automate your finances so you can reduce admin, get paid faster, and spend more time on your business.
Sage 50cloud Accounting You’re a small business with big goals. Sage 50cloud Accounting can help you reach them with time-saving automation for invoicing, expense and payment tracking, and data entry. With your data stored on your computer, you can monitor, manage, and grow your business.
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Our software will help you easily create reports, view your finances, process VAT and international payments, stay up-to-date on the latest financial legislation, and much more. Click to learn more. Free DEMO available.