Five Financial Documents that are Must Haves

Every single business owner has a vision when they start. However, vision alone won’t tell you if you can afford that new hire, or that fancy software, or even whether your business will still be standing in 6 months.

That’s exactly what financial documents are for. And yet, most small business owners put these on the back burner and are either completely missing them or haven’t looked at them since they first created them.

Here are the five financial documents that every small business owners needs to have (and keep updated at least quarterly), and what they do for you.

1. A Budget

Your financial plan rests in your budget. It maps out what you expect to earn, as well as spend, over a specific time period (I would suggest monthly, but quarterly and annually are also ok). Without a budget, nobody knows what you’re spending, how much you’re spending, or whether every single decision you make is gut instinct or pure luck.

Here’s the kicker… a good budget isn’t restrictive. It’s freeing. When you’ve pre-allocated funds for specific purposes in your business, spending doesn’t feel like a scary decision. You’re simply following your plan, moving your business forward with confidence, and acting confidently.

Already have a budget? Make sure you’re reviewing it monthly, not just setting and forgetting.

2. A Cashflow Forecast

Your budget tells you what you plan to earn and spend. A cashflow tells you when the money movement actually happens. This document prevents any unwelcome surprises, such as overdrafts, especially if you appear to be profitable. Indeed, it might look like you are bringing in more than enough cash, but if that cash is only showing up in month three, while your expenses are due in month two, that’s a giant red flag that needs to pop up. Enter your cashflow forecast. It shows you these gaps before they become emergencies, to allow you to prepare and plan.

This is one of the most underrated tools, especially in small businesses, but it is worth its weight in gold, especially for anxious owners.

3. A Profit & Loss Statement (P&L)

Your P&L is like a financial report card. It tells you what your business is doing well in, and where it can improve, by summarizing your income, expenses, and net profit or loss, over a specific period. Simply, it tells you if your business is actually making money.

If you ever want to apply for a loan, bring on an investor, or work with an accountant, this is one of the first documents they’ll ask for. Most importantly though, this document tells you without a doubt, how healthy your business is.

Review your P&L monthly. Don’t wait until tax time comes around to understand your business’ health.

4. A Balance Sheet

Where your P&L shows performance over time, your balance sheet shows a snapshot of your business health at a specific point in time. It covers what is yours (assets), what you owe (liabilities), and any equity you may have.

It sounds way more complicated than it is, and for most small businesses, you don’t need anything complex. A simple balance sheet provides everything you need with a quick glance, in three simple buckets.

A couple numbers, that show the true financial health of your business, on a specific day.

5. A Financial Forecast

Think of this as your budget’s best friend who loves more details, on a further timeline, based on assumptions. While a budget is often short term, a financial forecast projects your business’ financial future over years, not months, based on growth, market conditions, and expenses.

This is the document that turns your vision into a plan. Use this to make big decisions, without relying on your gut, such as hiring, buying, and expanding.

If you only have time to add one document to your business’ toolkit, make it this one.

The Bottom Line

You don’t need an accounting degree to create these for you, you just need to have them. Each one gives you a different lens into your business’s financial reality, and together, they give you the full picture.

Not sure where to start or feel overwhelmed trying to plan this out? That’s what our Clarity Call is for. We’ll look at where your business or idea is, what the next steps should be, and build a financial plan that works for you together. And luckily for you, I’m a trained accountant ready to help.

Book your Clarity Call today on korporateconsultingservices.com