As a small business owner, you take on significant risks and responsibilities to ensure the success of your business. While it's essential to focus on sales and customer acquisition, understanding your business's financial health is just as critical. In today's economic climate, understanding your business numbers is more important than ever. By regularly reviewing and analyzing your financial statements, you can make informed decisions about the direction of your business, and you can ensure that you're spending money on the right things.

One of the key financial statements that small business owners need to understand is the balance sheet. The balance sheet provides a snapshot of your business's financial health, including your assets, liabilities, and equity. It's essential to review your balance sheet regularly to ensure that your business has enough assets to cover its liabilities, that you're not carrying too much debt, and that your equity is sufficient to support your growth plans.

Another critical financial statement is the income statement, which shows your business's revenues, expenses, and profits or losses over a specific period. By reviewing your income statement regularly, you can identify trends in your revenue and expense patterns, and you can determine whether your products or services are profitable. This information can help you make informed decisions about pricing, marketing, and business development.

The statement of cash flows is also crucial for small business owners. It shows the cash inflows and outflows of your business over a specific period, providing critical insights into your business's liquidity and cash flow management. By reviewing your statement of cash flows regularly, you can ensure that your business generates enough cash to sustain your operations, meet your financial obligations, and fund your growth plans.

Understanding your financial statements, including your balance sheet, income statement, and statement of cash flows, is essential for small business owners. By regularly reviewing and analyzing these statements, you can identify areas of strength and weakness in your business, make informed decisions about your pricing and marketing strategies, and ensure that your business has the financial resources it needs to grow and succeed. So, take the time to understand your financial statements and use them to guide your business decisions.
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The spreading of costs over time, location, department or expense accounts.  For example, an electricity bill of a $1,000 may be spread or allocated over several locations on the farm.  The goal is to match the expense with the products being produced.

Depreciation Expense:
The cost to use a piece of equipment during a season, which reflects the decline in value of the equipment.  As equipment is used to produce income the value of the equipment is reduced because of wear and tear.  Over time the equipment will "wear out" completely and be of no value.  The idea is to record those usage costs to match the productive period of the equipment.

For example, you purchase a new tractor for $100,000 and estimate the tractor will be used for 5 years before it is worn out.  The depreciation expense of that tractor for one year is $100,000 divided by 5 which equals $20,000 per year.
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