One of the more important areas of running a small business is understanding the various types of financial reports. You don't need to become a CPA, but you will be making important financial decisions on a daily basis, so it's good to familiarize yourself with some fundamentals. That way, when you're sitting down to discuss your financial issues with your accountants and business partners, you're familiar with the terminology and the basic concepts.
When running a small business, you will likely go over a lot of financial reports. The three most common financial reports that you'll work with on a regular basis are:
Profit and loss statement: A summary report for a specific period of time, usually monthly or quarterly, that shows how money came in and where it was spent.
Cash flow statement: A more detailed version of the profit and loss that shows exactly what areas of the business are generating profit and which are creating loss.
Company balance sheet: An annual summary of all of the company's assets compared to liabilities.
When it comes to considering investing in either equipment, additional personnel, office space, or anything else related to your business, you'll need to think about the return on investment.
A return on investment is the profit an investment generates after the principle of the initial investment is paid.
When there is a large potential return on investment, that particular financial decision should be strongly considered. However, if a low return on investment or loss is projected, you should think twice before proceeding.
Return on investment report: Before making any kind of investment, create a return on investment report. The return on investment formula is ROI = Gain from Investment - Cost of Investment / Cost of Investment.
These are just a few of the very basics you'll come across when running your business. Remember, if you're unsure, it might be best to find a finance professional you trust to help advise you in these areas.
