It's about time to file income tax. To an individual, it may be a good opportunity to review your financial history of the past year. From your bank account statements, you can review or track your expenses and know where your money goes. You can categorize all the expenses, and then decide which expenses can be avoided or reduced. For example, you may be surprised to find out that you are still paying for the service that you haven't used it for a long time. You are still paying for it because you signed up for auto-pay a long time ago and you forgot to cancel this unwanted subscription or membership. You may also find out that switching your phone service provider or insurance company can save you a lot of money every month. If you want to minimize your expenses, you must change your spending habits or limit our spending to essentials. Tracking your spending is a good way to improve your financial health and build your wealth.
These concepts are applicable to all small businesses. Small business owners can benefit from reviewing their financial statements regularly. The income statement, balance sheet and cash flow statement are three important statements that can help you understand your financial picture in a quick glance. The benefits of reviewing your financial statements regularly include: (1) The earlier a financial issue is uncovered, the more time you will have to find a solution. (2) It will help you reduce unnecessary spending or avoid wasting resources accidently. (3) You will have a clear picture which section of your business is productive and which section is not. (4) You can do year-over-year performance analysis. (5) Based on financial statements, you will know where to improve and where to grow. You can predict future costs with greater confidence, set a realistic goal and plan ahead for new investment opportunities. (6) You will understand what you own and what you owe. (7) You will know how much cash flow is available for your business to operate. (8) Reviewing and understanding your financial statements can help you make a better decision.
Reviewing your Income Statement can help you understand your gross income, fixed costs, variable costs, overhead expenses, income tax and net income. It enables you to project future sales and expenses more accurately. You will know if your costs are within reasonable ranges or have any signs of waste; you will know if your sale prices are within reasonable ranges. If your costs are too high, you may need to look for better suppliers. If you only have a small number of customers, it is a risky business. If one of your customers says goodbye to you, you still need to pay maintenance fee, your fixed operating expense remains the same. Income tax checkup is also important for your new investment opportunity.
Reviewing your Balance Sheet can help you diagnose your business financial health, just like your family doctor looks after your health. You can understand what you own including fixed assets and current assets, what you owe including long term debts or short-term liabilities. You can evaluate your debts, check your credit score and review Account Receivables/Account Payables to ensure that everything is on the right track. By reviewing balance sheet, you can also compare this year's condition to last year's condition.
From your Cash Flow Statement, you are able to understand how much cash is available for your business to use. You will see the moving direction of cash inflow and cash outflow. You can also predict future cash flows. If you have adequate cash on hand, you can pay off your debt and save interest payout or invest it for better business opportunity.
Your financial statements are telling you some important information. As a small business owner, you should know what the real meaning behind the numbers. Reviewing your financial statements regularly not only improves your financial health, but also helps you understand your business better and keep your business stronger.