You may be asking yourself, what are financial statements and what do they have to do with me? The short answer is financial statements tell you how profitable your business is, what you own, what others owe you and how much you owe others. The three main financial statements are the income statement, balance sheet and cash flow statement. Let’s break this down even further, statement by statement.
We will start with the income statement. The income statement shows how much profit you have made for the period, whether it be the month, quarter or year. It shows how much revenue you have brought in and how much money you have spent (expenses) for the period. When revenue is greater, than expenses, you have a net profit. If your expenses are more than the revenue you have generated for the period, then of course you have a net loss. This is the key in determining whether you’re running a business or a hobby.
The balance sheet shows what you own, what you owe and the equity you have in the company. The infamous formula in accounting is ASSETS=LIABILITIES +EQUITY. Assets are what the company owns, including cash and money customers owe you. Liabilities are what the company owes others such as taxes, loans and amounts due to creditors. What the company owes its owners is equity, i.e., if the company sells everything it owns (assets) and pays everything it owes (liabilities), whatever is left is equity. This statement shows the financial position of the company at any given time.
The cashflow binds the income statement and balance sheet together. It is shows the inflow and outflow of cash and is comprised of three parts: operating activities (money used and received in the ordinary course of business), investing activities (money used and received from buying and selling assets) and financing activities (money used and received from taking out and repaying debt, stock, interest and dividends). Cash flow starts with net income then adds and subtracts the inflow and outflow of cash to get to the ending cash balance that is reflected on the balance sheet.
Why do you need financial statements? Financial statements are used to analyze the business to determine its profitability and strength. If you want to take out a loan from the bank, you need financial statements but they must be certified by a CPA. Statements can also be used to prepare your annual business tax return. Financial statements are the windows to the soul of a business. You can learn a lot about a business from its financial statements. They show you how the business is operating and how much of a profit you are making.
Do you know how to prepare your financial statements? Are you looking at them monthly and know how much profit you are making, what you owe and how much others owe you? I can help. Click the link below to contact me for help in preparing and analyzing your statements.
