The entrepreneurial spirit of the startup era makes this an exciting time to pursue a big idea or professional passion, but few innovators have any type of formal business training. Accounting is likely the least glorified task an independent business owner is required to tackle, but certainly one of the most important. Understanding and interpreting financial statements is important for any founder.
Understanding the basics of business accounting is a key factor for success. Starting with the balance sheet, it presents a company’s financial position at the end of a specified date giving a snapshot of a company’s assets, liabilities, and shareholders’ equity. This statement essentially shows what a company owns and owes.
Next, the income statement shows how much revenue a company earned over a specific time period. It shows the company’s profitability — a metric that every business owner should watch closely.
And the third report in the accounting “top-three” is a cash-flow statement that reports the company’s inflows and outflows of cash during a period of time. A company can be profitable, but still experience cash flow difficulties if money is not coming through the door quickly enough making it difficult to meet short-term liabilities.
When viewed together, the balance sheet and income statement represent a complete and, hopefully, accurate financial picture of the company. Done right, they serve as an invaluable tool in the management and planning of any business as every business owner needs clear, concise, decision-relevant information.
Take the steps outlined below to be better prepared to face and make critical financial decisions:
— Gather the last three years of your financial statements.
— Put the data in a spreadsheet
— Calculate financial ratios to focus on the relationship between the numbers as opposed to raw data.
— Compare financial performance to peers.
— Look at the changes and trends.
— Analyze the data, identifying problems and developing solutions.
— Take action: Formulate a plan, implement the plan and monitor the results.
Mission Valley Bank is a locally owned, full service, independent community business bank headquartered in Sun Valley, California with a business banking office in Santa Clarita and loan production office in the South Bay. Awarded “Most Trusted Advisor — Business Banker” by the San Fernando Valley Business Journal eight years in a row. For more information call (818) 394-2300 or visit www.MissionValleyBank.com.