Why you need financial statements

Many small business owners know roughly how busy they are, but not whether they are making money. Busy and profitable are not the same thing. Financial statements turn your daily sales and spending into a clear answer.

Three questions, three statements

• Am I making a profit? The income statement shows what you earned and what you spent over a period, such as a month.
• What does the business own and owe? The balance sheet shows your assets (cash, stock, equipment) and liabilities (loans, unpaid accounts) on one day.
• Where did the cash go? The cash flow statement shows money coming in and going out, and why you can be profitable on paper and still short of cash.

You will learn to read each one in the next lesson. For now, notice that each answers a different question. You need all three.

Why they matter for a small business

1. Decisions. Should you raise prices, drop a product, hire someone or buy equipment? The numbers tell you what you can afford.
2. Early warnings. Falling margins or growing unpaid accounts show up in the statements months before they become a crisis.
3. Funding. Banks and funders will ask for statements, or at least records you can turn into statements (course B3, lesson 4).
4. Tax. SARS expects you to declare your income accurately, and your records are your evidence.

"I'm too small for this"

You don't need accounting software or an accountant to start. A notebook or a simple spreadsheet, filled in every day, gives you everything needed to produce basic statements. What matters is the habit. As the business grows, a bookkeeper or accountant becomes worth paying for, and good records make their work quicker and cheaper.

A South African example

Gugu runs a busy tuck shop near a school in Mahikeng. She always seemed busy, but at month-end there was never much money left. When she started writing down every purchase and sale, her first monthly income statement showed the problem: she was selling cold drinks for less than they cost her to buy and keep cold. She had been working hard to lose money on her best-selling product. One price change turned the shop profitable.