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Understand the profit & loss and balance sheet financial statements

Many business owners just starting their business don't know how to read financial statements. Your business might not be operating for long, however, if you don't learn to read and use the profit & loss statement and balance sheet.

These financial statements are useful in many ways. For example, a profit & loss statement that compares the current year's income and expenses to those of the previous year will indicate if your management decisions are helping to increase or decrease profits. The balance sheet gives you a view of your overall financial health, and is an indication of whether it is improving or declining.

A banker can look at these financial statements and predict how long he or she expects you to stay in business. The profit & loss statement tells the bank if you are running a profitable business. The balance sheet tells the bank about your financial stability.

Generally what you want to see on a profit & loss statement is growth in revenue and net income. In order to increase net income or profit margin, some companies choose not to grow, choose to cut back on less profitable jobs or a certain type of work, or choose to not sell less profitable types of products. Even if you have selected no growth, slow growth, or less revenue this year versus last year, you still need to review your profit & loss statement to make sure that you are making money and not overspending on job or overhead expenses.

Year after year on the balance sheet, you should be looking for higher assets, lower liabilities, or a proportional growth in assets over liabilities. For example, if you purchased a piece of equipment this year for $30,000 and acquired a loan for $20,000, your assets have increased $30,000 and your liabilities have increased $20,000. A common rule of thumb is that the value of your assets should equal at least two times the value of your liabilities. So if you have $150,000 in assets, for example, you should have $75,000 or less in liabilities.

Find the financial report you need

To do this task

  1. Go to the Reports menu and click Reports Center. Company & Financial reports display.

  2. Click the report you need from the list of reports.

You can use the Report Center to browse through samples or descriptions of the reports.

See also

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