Financial statements are the primary source of information about your company’s economic performance. Financial statements provide a snapshot of your company’s financial health and assist you in making informed business decisions. Private companies operate under much stricter requirements than publicly traded businesses, but that doesn’t mean that private companies get off easy regarding accounting standards. Even private companies need to have solid financial reporting practices in place to remain compliant with IRS standards and maintain the viability of their company. So, what does that mean for you? If you own a private company, you must be extremely diligent in keeping track of your finances.
Finding the right finance team
The day-to-day operations of a business can be complex, and one of the essential parts of keeping things running is ensuring you have a good handle on your finances. It can be a challenge for even the most experienced business owner, and it’s essential to have a team that can help you understand your financial reports.
One of the most critical aspects of reading your financial report is finding the right team to help you. An excellent finance team will be able to explain your financial statements in plain language and help you make informed decisions about your business. If you’re not sure where to start, ask around for recommendations or look for a financial advisor who specializes in small businesses.
Make data-driven decisions based on your financial report
Your financial report is one of the essential tools you have for running your business. It can help you make data-driven decisions about where to allocate your resources and how to grow your business. But if you can’t read your financial report, you’re not getting the complete picture of your business’s health! It is alarming since you will not be able to make sound decisions for the progress of your business.
Know the difference between an equity and a debt report
When you look at your company’s financial report, you’ll notice that it is broken down into two sections:
- Balance sheet
- Income statement
The balance sheet breaks down your company’s assets and liabilities, while the income statement provides a detailed and clear picture of your company’s operating activities. On the other hand, the equity report includes information about the equity you own in your company and the equity owed to you from your partners. This report is essential to note because it helps you to gauge how your company is doing financially. You can also use the equity report to identify your company’s potential red flags.
Understanding your balance sheet
The balance sheet provides an account of what your company owns versus what it owes. The assets section of the balance sheet lists all your company’s money in its accounts, along with any property it owns and investments it has made. The liabilities section of the balance sheet lists all the money your company owes to creditors. The equity section of the balance sheet lists the amount of money you and your partners have invested in the company. This section also lists the amount of money the company has not paid back to lenders. Describe your company’s short-term and long-term assets. You can also list any intangible assets your company has.
Know what’s included in your income statement
The items listed in the income statement determine your company’s net income. Your income statement will list the number of sales you made, the expenses you incurred, any taxes you owe, and the amount of profit you made.
To conclude, the main takeaway here is that you need to understand what your company’s financial report is telling you. Not only do you need to know how to read the report itself, but you also need to understand how the numbers listed in the report impact your company. Knowing how your financial report breaks down and each section is meant to tell you, you can identify red flags and make informed business decisions to help your company succeed.
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