A BEGINNER’S GUIDE
Whether you work with us or do your own bookkeeping, the importance of having a solid grasp on your finances doesn’t change. In order to have this understanding, you also have to understand the components of your financial statements. Financial statements are broken down into three main statements: the balance sheet, the income statement, and the cash flow statement.
We’ll start out with the simplest part: balance sheets. Balance sheets are the shorter, sweeter of the three, they resemble an invoice, and include a tally of all business costs with a total sum at the bottom. Balance sheets outline a business’s assets, liabilities, debts, investments, and stockholder equities at any given time. Balance sheets are a great way for the business owner or any potential investors to review the company’s overall financial operations and examine limitations.
The following 3 elements can be found on any balance sheet:
An asset is defined as anything and everything that the company has full ownership of. This can include cash, accounts receivable, current inventory, prepaid expenses, investments, land, buildings, offices, equipment, and accumulated depreciation accounts.
A liability is defined as any outstanding debts owed by the business. This can include accounts payable, mortgages, credit card debt, and any ongoing expenses that are directly connected to the business, like property taxes or utility bills that exist to keep the company afloat.
Equity is defined as the business’s “book value,” which means the total amount that the business has in funds at any given moment. The most commonly recognized form of equity is the revenue that a business has earned to date. With a simple mathematical equation, understanding equity is easy:
Equity = Assets – Liabilities
The income statement is where a small business owner can see how their company profited during a specified period (monthly, quarterly, yearly). Income statements can also be called Profit & Loss statements and allow owners to track their earnings and their spending. In many cases, incomes statements will have a record of the cost of goods sold (COGS), which allows business owners to see how much money they spend producing their goods, prior to turning a profit on the sale.
Therefore, Gross Profit = Revenue – COGS
CASH FLOW STATEMENT
Cash flow statements are used by companies that rely on the accrual method of accounting. They are not always used as a standard business practice. Cash flow statements indicate revenue that a company has secured, but may not have received yet. Think of cash flow statements as a friendly I.O.U from the supplier. They also usually provide date for:
The cash flow from operations indicates how much a business earns on a daily basis. Cash flow statements help keep track of hoe much the company is spending and where those funds are being allocated.
The cash flow from investments outlines how much profit a business has earned based on its investment purchases on behalf of the company.
Cash flow from financing is similar to a balance statement’s liabilities. It’s an indication of the sources of cash from any investors, as well as banks. This section also refers to any money that a business owner has invested in the business and any outstanding debts, such as loans.
USING FINANCIAL STATEMENTS TO GROW YOUR SMALL BUSINESS
Financial statements are meant to be beneficial to every small business owner. They aren’t the fun part of the business day, but they can be an integral part of any business’s underlying cause. Different kinds of financial statements can provide a number of earning potentials, based on how they help navigate spending patters and keep track of cost and profit margins.
Small business owners can benefit from keeping a record of their financial statements for so many reasons. These documents are a business owner’s evidence of the company’s overall performance and activity. This is attractive to potential investors who consider partnering or purchasing stocks/shares, but need to know how the business is performing.
HOW FINANCIAL STATEMENTS MAKE TAX SEASON EASIER
Most small business owners prefer and need to focus on the day-to-day operations. Because of that, tasks like creating balance sheets tend to take a back seat if businesses haven’t hired an accountant, bookkeeper, or admin. However, keeping financials records also comes in handy during tax season.
Unlike regular employees, small business owners don’t get a single form or summary of income. Keeping a steady record or financial statements make tax season more manageable, as they are able to generate an accurate report quickly.
WHY FINANCIAL STATEMENTS MATTER
Understanding the financial status of your small business doesn’t have to be hard.
Knowing how to understand these three main types of statements will prep you to be more knowledgable of your business. Strong accounting is crucial for every small business. By keeping an organized record of financial records, all small business owners can make it easier to determine profit, loss, and future financial trends.