Small Business Financial Statements

Many entrepreneurs believe small business financial statements are not necessary. They just want to run their business, and as long as there is money in the bank to pay their bills they are happy.

If this describes you, it is highly unlikely you will see your business succeed. But even if it does, the day may come when you want to sell your business and the prospective buyer will want to see your historical financial statements…or you may want to borrow money from the bank for a small expansion, and your banker wants to see 2 or 3 years worth of financial statements—and on and on.

The point is: you need, or will need, a set of small business financial statements no matter how small your business is today.

Red Circled Number I want to emphasize here that you do not need to be a bookkeeper or accountant to read and understand your financial records and statements. All that is required is a general knowledge of financial statements—so let's start with…

What are Financial Statements?

Small business financial statements are the formal summary financial reports on the operation of your business. Note that they are simply "reports" of what is contained in your accounting records---they are not where you do your bookkeeping. They are your “scorecard,” and the “tally” of your business.

Financial statements are normally composed of four main elements:

Balance Sheet
This is the element that shows your Assets (the things your business owns, or is owed to your business) and Liabilities (the things your business owes others).

Profit and Loss Statement (P&L)
This element shows how well your business performed during specified periods of time. It simply shows sales minus expenses equals profit (or loss).

Retained Earnings Statement
This document shows cumulative profits (or losses) from the first day of operation of your business to the present. In many smaller businesses it will be combined with the P&L and/or the Balance Sheet.

Statement of Cash Flows
This shows how cash flows through your business. Again, in smaller businesses this report can be almost insignificant and is usually disregarded, (there are better ways to control cash flow) while in larger small businesses this report can be much more complex—and valuable.

Who Prepares Financial Statements?

For the simplest sole proprietorship, your “official” small business financial statements may simply be a copy of your annual tax return. More than likely you can prepare this document yourself…or, you can have a bookkeeping service or tax preparer fill out your tax returns (which is what I recommend). Either way, they will provide the most basic form of small business financial statements.

If your business is a bit larger, then you normally need to have "official" financial statements. This is especially true if you are dealing with inventory, more complex depreciation, or amortization. If you have incorporated your business, you will also need to file corporate tax returns and your company needs to have actual financial statements.

When you reach this stage of your business, I strongly recommend outsourcing your bookkeeping and preparation of your small business financial statements. Or, you can have a part-time bookkeeper come into your place of business to do your bookkeeping and prepare your small business financial statements.

The point here is that you, as the small business owner, at some point should not be involved in neither the day-to-day bookkeeping, nor the “preparation” of your small business financial statements. Understand your financial statements—yes! Analyze your financial statements—absolutely! Know how to use your financial statements—of course! Just don’t try to be your company’s accountant when things get a little more complex.

Uses of Financial Statements

I am frequently questioned about the uses of financial statements, because they are not part of the “production” aspect of your business. I have even had business owners tell me they didn’t think they needed financial statements—they could just take their big box of receipts into their tax person once a year and that worked just fine…and “look at all the money I’m saving.”

This is usually the same business owner who also complains when the bank won’t loan them any money. Actually, there are many uses of financial statements, that are accurately prepared in a timely manner. Here are a few:

You need them on a regular basis as your report card on how your business is doing…compared to your Business plan and goals for your business.

Don’t even think about going to your banker without a complete set of financial statements.

Your insurance company will want periodic copies of your financial statements.

Some of your suppliers will require a copy of your financial statements when you ask for credit terms.

For investors (if you have any), financial statements are the most important documents they want to see. This should include your family and friends if they invested in your business.

If you operate an “open-books” business (and you should), your employees need to see your financial statements, or at least a summarized version of them.

When you go to sell your business, prospective buyers will want to see financial statements that can pass their due diligence.

Your tax preparer will want to see your financial statements when they prepare your tax returns, although your accountant will most likely be preparing both your financial statements and your tax returns.

Depending on the state; state and local taxing agencies may periodically want to see copies of your financial statements.

As you can see, there are many uses for financial statements that the startup entrepreneur may not be aware of initially. Let’s just say it is best to start preparing regular financial statements as early as possible.

This has been a brief overview of small business financial statements, but there is much more information to cover, so I would recommend you go next to Understanding Financial Statements.

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10/5/11

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