3 Key Financial Statements Every Entrepreneur Needs Must Know
As entrepreneurs, it's essential to possess financial literacy rather than solely relying on an accountant. Why? Because ultimately, you'll be responsible for elucidating the figures to your shareholders, investors, and yourself.
Even if you're the sole proprietor of a small business, it's crucial to comprehend these figures to gauge the financial well-being of your enterprise, enabling you to make critical day-to-day decisions like adjusting prices, managing inventory levels, or deciding on hiring.
While your bank statements can indicate whether you're in profit or loss, they lack detailed metrics such as your business's burn rate (how long it can sustain itself on available cash) or the cash conversion cycle (how swiftly sales convert into cash).
Without delving too deeply, here are three key financial statements that entrepreneurs must grasp:
Balance Sheet: This document showcases your company's assets, liabilities, and equity, illustrating what you own versus what you owe. It's imperative to understand that borrowed money is considered both an asset and a liability, ensuring the balance sheet adheres to the equation: Assets = Liabilities + Shareholders’ Equity.
Income Statement: Providing a snapshot of your profitability, the income statement compares your expenses with revenue generated, detailing sales, cost of goods sold, and operating expenses. It separates transactions into operating (business-related) and nonoperating (non-business) categories, allowing for a clear understanding of revenue sources and expenses.
Statement of Cash Flow: Often overlooked, the cash flow statement maps how cash enters and exits your business, revealing true net cash flows over transactions. It combines data from the income statement and balance sheet, offering insights into your company's liquidity.
Understanding these statements empowers entrepreneurs to make informed decisions, ensuring financial health and sustainability for their ventures.