Responding to a Classmate
Running a small business requires adequate utilization of financial statements. The statements are essential in making decisions and in the determination of the business position in a market. However, many business owners overlook the importance of financial statements as they spend little in understanding the details of the reports.
Sometimes it might seem confusing for a small business owner while determining the best financial statement to use for their small business. The balance sheet, income statement, and cash flow statement present the information about the company’s performance. Nevertheless, cash flow is arguably the most fundamental statement to use for a small business. The report consists of three critical components. The components are cash flow from business operations, cash flow generated from the investment, and the financial activities. Reporting of cash flow for a small business is mainly every month since most of the purchases and payments for expenses are made monthly. Thus, a business owner needs to understand and pay close attention to the cash flow statement.
However, it is not advisable to underestimate the other financial statements as they are vital in complementing the cash flow statement. An in-depth understanding of the other financial statements makes it easier to prepare the cash flow statement. While the balance sheet provides information on the liability and the worth of the business, the cash flow on the hand summarizes the balance sheet and the income statement. A combination of all the financial statements presents an avenue for a business owner to understand how the business is operating. In this regard, the entrepreneur can develop stringent measures to curb the possible loopholes that might bring losses to the enterprise.