One universal sign of a responsible small business owner is a perpetual awareness of the business’s financial health. Responsible (and more likely than not, successful) business owners determine what’s working and what’s not by regularly examining a series of financial statements or accounting reports. Maintaining this habit also allows them to keep their records updated for taxes and sheds light on how much debt they can afford to take on at different points of the year. But while many articles about growth emphasize checking financial documents, they often don’t specifically mention which documents to check. There’s only a few, and most of them just happen to be the same documents you’ll likely need to apply for a small business loan.
Here are 4 financial documents small business owners should consult regularly:
Arguably the most important financial document for any small business is the profit and loss statement, which is also called an income statement. It tells you where your business’s revenue comes from, what are the most profitable parts of your business and what you spend your business’s money on. A quick glance at your income statement will reveal how much money your business makes from different sources of income or how much money you spend on different recurring expenses. This information is crucial for creating projections for either area along with detecting trends and differences in performance between certain time frames. You can use your income statement to compare current results to the same period from the previous year.
It is usually recommended to check your income statement at least once per month. Even though one particular month might feel like any other from this season, the actual data from your income statement may surprise you. If you are considering a small business loan, keep in mind that your income statement is one of three documents that make up a Business Financial Statement. You’ll need this for traditional business funding programs like a business term loan or SBA Loan. The other two documents are next on this list:
A cash flow statement is made up of three sections. The first is operating activities, which summarizes the amount of money flowing in and out of your business from sales and the expenses required for day-to-day operations. Any changes involving accounts receivable, inventory or your business’s actual cash are reflected in the operating activities section. This is where you’ll see how much your business is spending on income tax payments, interest payments, employee wages, and payments made to vendors or suppliers. The second section is investing activities, or the buying and selling of business assets, like equipment. Lastly is financing activities, or how much cash is flowing in and out of your business due to debt or equity related activities.
The third and final document that makes up a Business Financial Statement, a balance sheet tells you how much your business has and owes. You have your assets (bank accounts, property, computers, etc) and then liabilities (credit cards, business loans). Adding your assets and your liabilities gives you your total equity. The goal is to have more than you owe and gradually increase the difference between the two over time. Another great use of your balance sheet is comparing short-term assets to short-term liabilities. This will let you know if you have enough liquid assets (assets that can be converted into cash) to cover upcoming payments.
Many business models revolve around invoices. In industries like construction, healthcare, and wholesale, companies must send invoices to customers and make sure they are paid on time so they can meet regular expenses. An accounts receivable aging report provides a time frame from when an invoice was sent to when it was collected. You can learn which customers frequently pay late, when they started paying late, and how much money certain customers owe you.
If you are awaiting compensation from a number of customers but must meet a significant expense (or multiple expenses) very soon, you should look into accounts receivable factoring. In exchange for a small percentage of income, the business lender purchases your unpaid account and pays you in just a few business days. Many UCS clients use accounts receivable factoring very often because bigger clients tend to take longer to pay, and saving money is just one of myriad advantages to paying recurring bills early.
Speaking of small business loans, most business lenders would likely advise potential applicants to not even think about applying without consulting the aforementioned documents or reports. In fact, the process of having to spend time looking over this information and then determining what it means for your funding options will likely be the hardest part of your entire small business loan journey. Instead of only consulting these documents before applying, consult them on a regular basis so the information stays fresh and won’t catch you off guard at the last minute.
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