Cash is the lifeblood of any business. One of the most common reasons businesses fail is because they run out of cash. A company can consistently report a profit and yet still go out of business because it runs out of cash. So, it’s important to carefully manage the cash coming into the business and the cash flowing out.
There are three standard financial statements that businesses use to understand and explain the health of the business. These are the cash flow statement, the income statement, and the balance sheet. None of these statements, on their own, can give you a complete picture of the health of the business. Especially in smaller businesses, cash is critical so I find the cash flow statement the most important to watch to understand the immediate health of the business, but neither the balance sheet nor the income statement can be ignored.
By the time I earned my MBA, I had spent a couple of decades looking at and analyzing these three types of financial statements. Since my undergraduate degree was in engineering, I had to take basic accounting pre-requisite classes before starting the MBA program. I found it fascinating to learn how these three financial statements work so seamlessly together.
In the article linked below I provide a brief guided tour of these three financial statements and what they tell you about the health of your business.