Three Financial Statements That Every Business Owner and Nonprofit Manager Needs To Understand
Financial statements are an essential part of small business and nonprofit finances. They provide a snapshot of a business’s or organization’s financial health and performance. Each one provides valuable information that can be used to make decisions about the future of the business or organization. Understanding these statements is essential for any business owner or nonprofit manager who wants to make informed decisions about their finances.
What are financial statements?
Financial statements summarize the financial performance over a specific period, such as a quarter or a year. These statements include three direct reports:
Income statement,
Balance sheet, and
Cash flow statement.
Balance Sheet
The balance sheet expresses the financial position of a business or an organization. It shows three things about its financial health: its assets, liabilities, and shareholder equity (or capital). When combined, these three elements make up the worth of the business or organization for the period the balance sheet covers.
Income Statement
Also called the Profit and Loss (P&L) statement, the income statement helps determine whether the entity turned a profit or loss for each period of time. An income statement summarizes its profitability and financial results for a period and focuses on revenue and expenses. This financial report shows what it costs to create your products and services and keep the business or organization running. It is handy to compare how revenues increase or decrease over multiple periods.
Cash Flow Statement
A cash flow statement measures how well cash flows through a business or organization to keep operations running, pay employees, pay bills, and invest in opportunities. It is the third primary financial statement owners and managers must produce. Cash flow statements enable you to understand how a business or organization runs: if there’s sense, process, and predictability in the operations, and if it is on solid financial footing.
Anyone can learn how to create and draw insights from financial reports. Investors, business owners, and managers need to understand the results and trends to drive the business successfully.
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