For you to be able to know if your business is performing according to its mandate there is need for tracking. Tracking can be done through the use of financial statements. The statements serve the purpose of identifying the prices, the cash flow and even the margins. You will also get an easy time when it comes to paying tax.
This statement provides an overall financial snapshot of your small business. As an equation, it looks like liabilities + owner’s equity = assets. The two sides of the equation must balance out.
There are two types of assets: current and fixed. Current assets include cash or other holdings that can quickly be converted to cash within a year. These may include inventory, prepaid expenses and accounts receivable. Machinery, equipment, land, buildings, furniture and other essentials that you are not planning to sell are considered fixed assets.
Liabilities can be broken down into current or short-term liabilities, such as accounts payable and taxes, and long-term debt such as bank loans or notes payable to stockholders. Owner’s equity includes any invested capital or retained earnings. If you captured all of your accounting information correctly, both sides of the balance sheet equation should be equal. Download SCORE’s template to start setting up your own balance sheet.
The other essential financial document in a business is the profit and loss statement. It reveals how much a business is able to make and cost management. The document serves two very specific purposes.
The profit and loss table covers two major components of the overall health of a business. The first of these components is the calculation of the company’s revenue. An established company can make projections on its future revenue based on its past sales and expected income. Start-up companies must make these projections based on factors such as customer demand, market size and competition for their product or service. A company that makes unrealistic revenue projections must either adjust its expectations or improve its sales processes.
The other major component is the projection of future expenses. Expenses can include building rent, salaries, equipment purchases and other overhead costs. As a small business begins and grows, it may find that its expenses climb at a rapid pace. These expenses can involve hiring and training workers, buying supplies and promoting the business. The owners must also make accurate expense projections to avoid having the business stall before it can launch.
One of the most overlooked financial documents in business is the cash flow statement. This document does more than just highlight the use of cash in an organization. It will show if a business is running out money or even if the owners are taking too much money form the organizations.
In addition to reporting cash flow from operations, the cash flow statement can highlight other key factors to consider in a business’s strategy.
A cash flow statement shows if a business is running out of money, even if it is profitable at the same time. Fast growing businesses often show a net income but have their cash tied up in accounts receivable or rely too heavily on bank financing.
A cash flow statement will tell if the owners are taking too much money out of the business, which is not something you would see on the income statement. Distributions should not exceed cash flow from operations.