Important Financial Statements to Keep Your Business Running Smoothly

Posted by Ryan Howard on Feb 10, 2023 3:04:00 PM

Important Financial Statements that Keep Your Business Running Smoothly

Financial statements are as important to business leaders as they are to investors. Working capital provides a financial snapshot of your business on the balance sheet - the difference between the company's current assets and its current liabilities. A cash flow statement offers insight into the expected cash generated over a certain period of time. Both cash flow and working capital affect each other and are valuable measurements of financial health.

Let's review these important financial statements to keep your business running smoothly.


The Balance Sheet

The balance sheet is used to review a company's assets against its liabilities and owners' or shareholders' equity. Owner or shareholder equity, in the simplest terms, is what has been invested in the business. Divided into two columns, one represents the company assets and the other side included the liabilities and equity. These two columns must balance out. 

The assets on the balance sheet may include cash, resources that can be turned back into cash, such as things that can be sold, or where cash is expected, such as accounts receivable. Liabilities would include anything a business owes, such as accounts payable, debt, salaries and other expenses.

The Cash Flow Statement

While the balance sheet looks at all assets owned by a company, the cash flow statement focuses only on cash - where it's going, where it's coming from, and how much is currently available. This includes expenses, investments, operations, financing and more. Cash flow is different from profit as it provides the flow of cash into and out of the business. Net profit reveals if the business is profitable after all expenses have been paid. 

Investors look at the cash flow statement to determine the growth, maturity or decline of a business. For instance, a positive cash flow may reveal that the company has excess cash available for investing or growing the business, but it may still not yet be profitable. A negative cash flow simply means that the business is spending more than it's bringing in. The cause of that should be remedied as quickly as possible and is often due to delinquent accounts receivable.

Outsource Accounts Receivable for More Cash

How Do Working Capital and Cash Flow Affect Each Other?

Working capital is used to pay expenses and employee salaries, basically keeping your business up and running. Your cash flow may be challenged at the same moment but if your business has a large amount of working capital, you may still be able to stay in business for a while longer.  Likewise, a positive cash flow may reveal higher levels of debt but lower working capital.

Either way, running your business means keeping your expenses in check and collecting what's owed to you. These statements are important measures of financial health for your business and those who may want to invest in it. 

Topics: Best Practices, Entrepreneurs