Financial management is critical to the ongoing health and vitality of a business. Financial statements are the vital life signs that tell how the business is doing.
It is important for every entrepreneur to take the time to understand the financial measures of his or her business.
The Purpose of Financial Statements
Financial statements include the various forms of income the business generates and the expenses associated with operating the business.
A business can take many forms. It can be a proprietorship, a partnership, a corporation or an individual. The financial statements tell the reader where the business stands financially and how it got there.
Financial statements enable a variety of people to assess the business’s financial health, the value of the business and its future prospects. These people include shareholders, investors, a bank who uses them to assess the ability to secure and repay a loan and the income tax department.
However, the primary user of the financial statements is the entrepreneur or business owner. Financial statements are a report card that measures what you are doing right and where you need to make improvements. Without them, you are flying blind.
Financial statements complete the Feedback Loop for the entrepreneur. Ideally, the entrepreneur prepares a financial projection of anticipated income, expenses and profitability. At The Covenant Group, we work with our clients to prepare One & Five Year Income and Expense Pro-formas. The pro-forma statements give a financial picture of the business goals and allows for “what if” scenarios to describe how the business will get there.
The pro-formas become your financial navigation system that ensures you are not flying blind into the future. The financial statements tell you whether you are on course to achieve your goals, and if you are off course, by how much.
The financial statements provide a summary of how you have done so far and form the basis on which you can adjust your flight plan. As a result, you can better manage the ongoing health and vitality of your business.