Assume that you are the owner of a sole proprietorship and you have just hired a new assistant. In the past, your assistants have had difficulty understanding the importance of financial statements to your business. Write down what you would say to your assistant about the importance of income statements, balance sheets, and other financial documents in making financial decisions.

A business owner taking on an assistant and explaining the importance of financial statements should explain that financial statements provide a snapshot of the company's financial status, with expenses, such as salaries, health insurance, equipment, shown in one column and revenue, such as money coming in from sales to customers, in another column.

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A small business owner, as with owners/managers of large corporations, live and breathe the data that collectively comprises a financial statement. Without a clear, concise picture of the balance the company holds between revenue and expenses and without clear itemization so that readers of financial statements can understand from where the revenue comes (e.g., sales to customers, returns of investments, donations) and to where payments go (e.g., salaries, utility costs, materials for use in manufacturing a finished product), it is virtually impossible to manage a business over any sustained period of time. Failure to produce and pay attention to accurate financial statements will most certainly lead to serious financial problems for the owners of the business in question.

A sole proprietor taking on a new assistant will, in the event that assistant will be responsible for financial management of the entity, require thorough knowledge on the part of the assistant for how financial statements are produced and how they are read. This is not rocket science. Any business owner understands, or should, the need to keep track of outgoing and incoming money. That only stands to reason. A business exists to make money for the owners and to provide jobs for its employees. It cannot make money and remain in business for long if the owners are not diligent in tracking and recording financial flows.

Business owners must know how much money goes out the door in the way of expenses for employee salaries (and one’s own salary) as well as paying taxes; providing health insurance; paying into worker compensation accounts; purchasing items needed to operate, such as computers, note paper, and office equipment like desks and chairs; and buying the materials that are used in the manufacture of the goods sold or the services provided to customers.

There are utility costs associated with operating, such as electricity, gas, and water. Depending upon the type of business, there might be a requirement to replace worn-out or obsolete equipment with new equipment—a substantial expense. All of these expenditures must be reflected on financial statements so that owners can understand where the money goes.

Conversely, a financial statement includes a listing of all incoming revenue, most or all of which is generated through sales to customers. A financial statement might also include, when relevant, money entering business accounts from loans attained for the purpose of purchasing new equipment or physically expanding the size of the business, such as purchase of adjoining property in order to build additional operating space.

The student question specifies sole proprietorship of the business in question, so we are clearly not dealing with a publicly held corporation, in which case the financial statement would include data on revenue generated through investments from stockholders while also showing expenses paid out in for the form of dividends.

A financial statement is not a series of descriptive paragraphs: it is a list of expenses and sources of income, sometimes side by side, often times reflected on separate sheets of paper. Readers of financial statements need to be able to scan these statements and comprehend their significance. They may be self-explanatory or require background and explanatory information included in an appendix, in footnotes, or simply conveyed orally during a meeting.

A business owner who has had difficulty helping assistants to understand the importance of and structure of financial statements is either hiring the wrong people or simply failing to adequately explain the matter. A new assistant should be able to sit down, read a financial statement, and understand the basic elements, if not the specifics. To repeat, anybody entering the business world should understand two lists of figures, one showing expenses, the other revenue. A statement revealing expenses that clearly exceed revenue is in trouble. A statement that shows revenue in excess of expenses is making a profit—a profit that might be reflected in a bigger paycheck for the assistant. A balance between the two is self-explanatory as well.

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