by Matt Alderton | December 05, 2018
Whether you run a small business or a large corporation, your company's success hinges not only on the quality of its products and services, but also on your ability to steer its ship in the right direction. Because business fundamentally is about money, that requires you to understand the bottom line -- which is impossible to do unless you can read and comprehend your company's financial statements. 

"Financial statements are the box scores that tell everyone how your … business is doing financially," says Small Business Trends contributor Rob Starr. "They usually contain two reports that tell the story of your finances: the balance sheet and the profit and loss statements."

In case you're not an accountant, knowing what each of these statements says will help you make the best decisions for your company.

Start with the balance sheet, which lists your company's assets (i.e., what your company has) and liabilities (i.e., what your company owes). "The balance sheet summarizes key financial information at any point in time. It provides an efficient way to determine the health of the organization," Derek Carter, chief solutions officer for Ceterus, tells Starr, adding that the bottom-line number on every balance sheet is the "current ratio" -- current assets divided by current liabilities. "If the ratio is less than 1, that company could have issues paying their current liabilities."

Next is the profit and loss statements, which tell you how profitable your business is over a specific period of time. "I suggest reviewing either several months at a time or year over year. Doing so will help you see trends that can help drive future business decisions," Carter tells Starr, who says, "Spotting these trends will help you to make any adjustments quicker. For example, if sales go down for several months in a row but payroll doesn't, it should be obvious you might need to do something with your number of employees."

Although there are many other important financial statements to ingest -- including cash flow statements -- understanding these two statements will give you a solid start toward assessing and influencing your company's financial health.

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