There are few things more exciting than running your own startup. There’s the thrill of watching your business grow and pursuing your dreams. Every milestone, from making your first sale to hiring your first employee to cutting your first paycheck to yourself, feels like a major accomplishment.
It’s not all thrills and excitement, though. You are running a business, so there may be some aspects that don’t get your adrenaline pumping. Analyzing financial statements may be one of those tasks.
For many entrepreneurs and startup founders, financial statements are a mystery. After all, you started your business to pursue your passion and turn your ideas into reality. You may not have a finance background or be familiar with startup accounting problems, and even if you do, you may not have an interest in dissecting numbers.
However, it’s worth it to educate yourself on financial statements. They’re not just documents with a bunch of numbers. They’re powerful tools that can give you insight into your business and help you achieve your objectives.
Below are the four types of financial statements and how you can use them to build and grow your business.
Statement of Cash Flows
A cash flow statement is one of the most important planning tools you have available. It shows your expected cash flow over a projected period of time, like the next month or quarter. It doesn’t show income, but rather the path of cash as it enters and exits your business.
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Many startups fail because of cash flow issues. In the early days of your business, your cash flow may be inconsistent. Cash crunches could be fatal to your young startup. A statement of cash flows can help you predict possible cash flow issues and take action to minimize their impact.
Income Statement
Like a cash flow statement, an income statement is one of the most important and valuable financial statements at your disposal. It shows your business’s performance over a defined period of time. It starts with sales and other revenue, then subtracts out all expenses. The result is your net profit or loss over the defined period.
You can usually run an income statement over a month, quarter, year, or more. Also, you can break down your expenses in as much detail as you want, which could be helpful if you’re analyzing profitability or margins.
If you want to attract investors or secure any kind of financing, you will need an accurate, detailed income statement available. It’s usually one of the first documents an investor or lender wants to see.
Additionally, your income statement provides insight into your company. You can use it to gauge performance. Information about revenue and spending could help you make informed decisions about strategy, operations, and more.
Balance Sheet
A balance sheet is a snapshot of your company at a specific point in time. It shows the value of your company by displaying all assets, liabilities, and equity. Investors, lenders, and other interested parties usually want to see your balance sheet to get a feel for the value of your business.
It’s called a balance sheet because the two sides of the sheet always equal each other. Your assets equal your liabilities plus equity. The balance sheet usually lists assets in order of liquidity. Liabilities are categorized as short-term debt and long-term debt. The balance sheet can give you an idea of your business’s value at any given point in time.
Statement of Changes in Equity
This document illustrates any changes in equity that happen over a specified period. For instance, your company could issue shares, buy back shares, or issue dividends to shareholders.
This document usually isn’t relevant until you have shareholders. However, if you do have investors, they’ll be interested in this information.
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