Need to Know: Basic Financials for a Business
For every business there are four financial documents that are essential for your business to create and update. The challenges of making business decisions requires these documents to give you an overall understanding of your business’s health. One important thing to remember is to not let the formatting or the terms of the documents intimidate you into not upkeeping these important keys to your business finances. The three basic financials for a business are: the balance sheet, the income statement, and the cash-flow statement.
The balance sheet outlines your business assets both current and fixed against your business liabilities and owner’s equity. Current assets are the cash and other liquid assets that can be turned into cash readily. These include any of your business inventory, accounts receivable, or other prepaid expenses. Fixed assets are those assets which are not intended to sale or easily liquid, these include your business equipment, furniture, and real estate. Liabilities are those debts owed by the business, this includes any notes or accounts payable. The balance sheet is the most basic of accounting formats, the left assets column will always equal the right liabilities and equity column. The basic accounting equation is Assets = Liabilities + Owner’s Equity.
The balance sheet is used to report the current financial position of the business by comparing your assets against your liabilities. It is the most basic of financials that you will need to understand the current and future position of your business. Often when dealing with banks, other businesses, or potential investors the balance sheet is the first document they will review for financial solvency and future business feasibility.
The income statement, also known as the profit and loss statement, compares the projected or actual sales against the expenses for a given time period. The difference between the the sales and expenses is the business’s net profit. The net profit for a period can help you project future trends and business cycles. You should also try to include all of your operating costs to have a better picture of your business’s financial health. Some operating costs often missed include legal expenses, repairs, utilities, and any taxes. The better your records, the better the ability to project future trends. The basic formula for an income statement is Income – Cost of Sales = Gross Margin, then Gross Margin – Operating Costs = Net Profit. The income statement is used to track these numbers over a period of time as opposed to a single point in time as a balance sheet shows.
The last essential financial document for any business is the cash flow statement. The cash flow statement shows where the income received came from and where the costs paid went. It is used to better understand where your income is generated and where your expenses are being spent. The list of cash inflows and outflows are typically simplified and modified for small businesses and can include cash sales, accounts receivables, notes receivable, equipment purchased, inventory on hand, and other expenses paid. To calculate your cash balance, take the beginning cash balance (usually the paid in capital) add cash flows and subtract your cash outflows. Cash Balance + Cash Inflows – Cash Outflows = Ending Cash Balance.
With these three essential financials for your business you will have the core data needed to ensure you business is healthy and guide your decision making for future success. For a free consultation on protecting your wealth and assets for your business call Reidel Law Firm today at (832)510-3292 or use the contact form below.
