There are a few different types of financial statements that you may need to produce for yourself and others. These statements can point to the health of your business at any given time.
Balance Sheet
This is a snapshot of your business on a particular day in time. The first formula which is the Accounting Equation: Liabilities + Owner’s Equity = Assets is essentially the balance sheet. Most financial software will produce this for you automatically with a touch of a button. As long as you’ve done your data entry right, the balance sheet will be accurate as of that date. Both sides of the balance sheet should be equal if you’ve entered everything properly into your system.
Profit and Loss Statement
Some people also call this an income statement. This basically lets you know what your net income is at the time of creating the statement. To determine your net profit, you’ll need to use the Net Profit formula: Gross Profit – Total Operating Expenses = Net Profit.
Most accounting software will also produce this document for you with a touch of a button. It’s important to figure this out occasionally and at least quarterly, so that you can pay your self-employment taxes properly.
Cash Flow Statement
One of the most often overlooked financial statements among small business owners is the cash flow statement or statement of cash flows. This statement helps you understand how much money is coming in and going out of your business on a periodic basis. It’s based on any type of cash coming into the business (not just income from sales), and any type of money going out of the business (not just expenses).
The formula looks like this:
Beginning Cash Balance + Cash Inflows – Cash Outflows = Ending Cash Balance
Understanding your cash flows will help you run your business better. Knowing it, you can make a cash flow budget to help you better manage your business so that you always have enough cash on hand. For example, if you have a slow time of year, you need to manage the cash flow when it’s high so that you can cover times when it’s low.
If you want to get started on the right feet with bookkeeping for entrepreneurs, remember that this is one of the most important aspects of business success. Knowing your numbers is important because you will be acting with knowledge instead of just guessing. Guessing can be a big mistake.
Knowing the real numbers will help you know if your business is becoming more profitable as you go. It will also mean that you will know when you need to do something to save your business. Business bookkeeping isn’t really that hard. People like to make it more complicated than it is. It’s simply keeping track of everything coming into your business and going out of your business on a regular basis, and keeping the documentation for it all in an organized manner.
*This article is not intended to replace professional business advice and planning. Always contact professionals regarding any business advice, financials, planning, operations, and/or management.