Incredibly, many entrepreneurs and small business owners rarely know their financial numbers, stats and facts. They really don’t know their true valuation and are shocked to realize that their businesses have been nothing more than a hobby all along. But properly prepared financial statements can set the record straight, define a business from a hobby and determine the real evaluation of a small business. Shark Tank’s Kevin O’Leary routinely humiliates entrepreneurs and small business owners for over evaluating the worth of their business and not knowing their numbers! Remarkably, many entrepreneurs and small business owners continue to come on the show without proper financials in hand to defend their evaluations, and they leave without an investment.
There are several financial statements that you can generate, but here are the big three: Income Statements, Balance Sheet and Cash Flow. These three statements can help quantify predictable data, potential growth and maintain a running tab on the company’s value.
Income Statement is your report card on your company’s ability to generate profits. It monitors your revenue and expenses to help you assess your company’s performance over a time period. Without it you can’t control your company’s budget.
Balance Sheet demonstrates your company’s financial value at a point in time. It’s comprised of assets, liabilities and the business owner’s equity. Besides cash holdings, an asset can be real property like computers, vehicles or product inventory.
Cash Flow Report displays where you generate revenue and where you spend it. It can analyze operations, investments and their affects on cash and cash equivalents.
For most entrepreneurs and small business owners, these accounting items are not a do-it-yourself activity; they should be prepared by a tax professional.