Have you ever sat down to make a business decision and wondered if what you were leaning toward was a wise choice? You’re not alone. Some might say that smart business decisions are made by those that are business savvy – that answer makes it sound as if being a smart decision maker requires an advanced degree or some type of natural-born talent. Although both of those might be helpful, they’re not required to make smart business decisions. In fact, we believe that smart business decisions are made when those doing the decision making consult the right sources (and we’re not talking about a magic 8 ball).
The answer is simple – financial reports.
How do we create a financial statement?
It all starts with a bank statement. We take a look at your your expenses and income and then categorize them into a variety of categories like:
- Supplies
- Food & Entertainment
- Marketing Costs
- Business Equipment
- Auto Expenses
- Owner distributions
- Loan Payments
Here’s where we put our accounting degree to work and create your Profit & Loss Statement and Balance Sheet.
Where to Look When You’re Making Business Decisions
You’ll want to have access to all of these reports for a variety of reasons, but to really make smart business decisions you’ll want to look directly at your P&L. Many business owners look to their cash balance (you can find this on the Balance Sheet) when they’re deciding on purchasing new machinery or hiring an additional employee. That makes sense, no use in thinking about purchasing or hiring if you don’t have the cash to support it. But the Balance Sheet only tells us where we stand at a certain point in time (the end of the month). Your P&L gives you a better picture of how you’re business is fairing overall. If you see a net loss, you might decide holding off on those decisions and see how things go over the next several weeks.
Want read more about the differences in financial statements? You can catch it all in more detail here. Looking to hear it from a certified CPA and one of our co-founders, Ben Sutton – watch the webinar here.
FAQs: Making Smart Business Decisions
1. What are the key reports to consult when making business decisions?
To make smart business decisions, consult your Profit & Loss (P&L) Statement and Balance Sheet. The P&L gives a comprehensive view of your business’s overall performance, while the Balance Sheet shows your financial position at a specific point in time.
2. How does a Profit & Loss (P&L) Statement help in decision-making?
A P&L Statement helps by showing your business’s revenue, costs, and expenses over a specific period. It indicates whether you’re making a profit or loss, guiding decisions such as purchasing new equipment or hiring staff.
3. Why is a Balance Sheet important for business decisions?
A Balance Sheet provides a snapshot of your business’s financial health at a specific point in time, showing assets, liabilities, and equity. It helps you understand your cash position and overall financial stability before making significant investments.
4. How do I create a financial statement for my business?
Creating a financial statement begins with your bank statement. Categorize your expenses and income into categories such as supplies, marketing costs, and auto expenses. From there, generate your Profit & Loss Statement and Balance Sheet to summarize your financial data.
5. Should I rely solely on my cash balance for business decisions?
No, relying solely on your cash balance is not recommended. While it’s essential to know your cash position, the P&L Statement provides a better overall picture of your business’s financial health. It helps you make more informed decisions by showing profitability and expense trends over time.
