Running a business can feel like a steep learning curve. Understanding the importance of financial documents will help put you in a great position to run a profitable business.
Financial documents and statements are filled with valuable insights into your business’s performance and viability. Learning how to create, read, interpret and use financial documents and statements will give you a fundamental understanding of your financial position. Templates are available from the Australian Government for free.
Financial documents are useful tools to help you manage your business, however these are often used by banks to assess loan applications to measure the growth potential of your business. When our team are organising your equipment finance, our finance brokers may request a copy to provide to the lender.
Three key financial documents worth mastering are: balance sheets, profit and loss statements and cash flow statements.
1. Balance sheet
A balance sheet is a statement which describes the financial position of a business. This document will provide you a clear snapshot of your business’s finances at a point in time. It lists the business’s assets (such as your business’s cash, equipment, property, vehicles and stock), liabilities (debts that the business needs to pay) and equity (the value of the assets of the business after its liabilities have all been paid).
How to use a balance sheet:
- Use your updated balance sheet to get a clearer picture of your business’s overall financial health.
- Your balance sheet will help you to identify things like whether you’re making enough money to pay for future expenses and whether your business is growing or declining.
- Your balance sheet will also help you with benchmarking against other businesses, applying for loans and securing investment.
2. Profit and loss statement
A profit and loss statement shows how your business has performed over a particular period of time. Also known as an income statement or revenue statement, a profit and loss statement will show you where your business has made (or lost) money.
How to use a profit and loss statement:
- Use your updated profit and loss statement to identify opportunities for cost savings and areas to invest in.
- A profit and loss statement can also be a valuable forecasting tool when planning for the financial year ahead.
3. Cash flow statement
According to the Australian Small Business and Family Enterprise Ombudsman, low cash flow is the leading cause of small business insolvency. So, having healthy cash flow is critical to the future of your business. A cash flow statement will help you keep track of the money entering and leaving your business. Incoming cash can come in the form of sales revenue, grants and rebates. Outgoing cash is the payments your business makes, including rent, wages, rates, utilities and other purchases.
How to use a cash flow statement:
- Getting in the habit of creating and reviewing a monthly cash flow statement will provide important insights to support your business’s operations and growth.
- Over time, a cash flow statement will help you to anticipate costs and identify trends so you can plan for the future.
Next steps
As you grow confident with creating and interpreting cash flow statements, your business knowledge and decision making will make more positive impacts on your business. Mastering the above mentioned financial documents will give you a fundamental understanding of your financial position.
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DISCLAIMER: The above content is to provide general information and does not constitute financial, legal or other advice. This means that duties and requirements imposed on people who give financial advice do not apply to this content. For advice contact your accountant or legal advisor.