WHAT BUSINESS OWNERS SHOULD KNOW ABOUT FINANCIAL STATEMENTS

Most small business owners don’t start their companies because they love anything that relates to numbers. You are passionate about your craft, service, or product. But here’s the thing: your financial statements tell you an important story about your business.

If you're not paying attention, you could miss important clues about your business’s profitability, cash flow, and overall health. Think of them as sort of like your business report card, which helps you see what’s working, what’s not, and where you need to adjust before it’s too late. Ignoring them is like driving a car without checking the fuel gauge; you might be fine for a while, but eventually, you’ll run into some sort of trouble.

At the core, there are three financial statements you should be familiar with. The Profit & Loss Statement (P&L) shows your revenue, expenses, and whether you’re making a profit or not. It helps you track trends over time and determine if your pricing, sales, and expenses are working in your favor. The Balance Sheet is a snapshot of what your business owns (assets) and what it owes (liabilities). It’s a crucial tool for understanding your financial position and net worth at any point in time. Then, lastly, there’s the Cash Flow Statement, which tells you if you have enough cash to cover your expenses, pay your employees, and invest in your business’ growth. Many profitable businesses fail because they run out of money, so keeping an eye on cash flow is critical.

One common mistake small business owners make is confusing revenue with profit. Just because sales are high doesn’t mean you’re already making money. You could be in danger without realizing your expenses are eating away your earnings. Another pitfall is neglecting cash flow. You might have invoices going out, but if your customers are not paying on time, you could find yourself struggling to cover your bills. Understanding these numbers helps you make better decisions, such as when to cut costs, when to invest in growth, and many more.

You don’t need to become a financial expert overnight, but reviewing your financial statements at least once a month can give you better control over your business’s future. If this still feels overwhelming, consider working with an accountant or financial expert who can help you interpret the numbers and plan. The more you become engaged with your finances, the more confident and prepared you’ll be to make smart business decisions in the future, and that’s what leads to long-term success.