Just the basics for now:
Financial Statements may sound too much like a ‘big company’ or CPA term to many small business owners but it need not be intimidating and, once understood, will be a very helpful tool for your company.
To begin this series, we will address the 3 basic financial statements to disclose what they are, what they mean, and how to use them. Most of the accounting software packages can produce these statements on demand but until you understand what they are saying, it is difficult to know if they are correct.
Primary Financial Statements include:
- Income Statement, often called Profit & Loss
- Balance Sheet
- Cash Flow Statement, or sometimes referred to as Sources & Uses of Cash
The Income Statement reports the outcome of the company doing business over a period of time (such as a month, quarter, or year.) This report is intended to show how much the company makes (or loses) by conducting business. The key elements are:
- Sales or Revenue or Gross Income
- Cost of Sales or Cost of Goods Sold
- Operating Expenses
- Non-Operating Income/<Expense>
- Income Tax
- Net Income (the Bottom Line)
The Balance Sheet is a snapshot of what’s left a single point in time as a result of the company doing business. This report can be very simple (for Cash-based accounting) or more complex when a business uses Accrual-based methods. With this in mind, a company will have all of the categories but not necessarily all of the underlying listings on their Balance Sheet:
Assets
- Cash & Equivalents
- Accounts Receivable
- Fixed Assets (net of accumulated depreciation)
Liabilities
- Accounts Payable
- Credit Card Balances
- Accrued Expenses
- Long Term Debts
Equity
- Investment by Owners
- Retained Earnings
A Statement of Cash Flow organizes the transactions in a manner to show which ones brought cash into the company and which activities reduced cash. Like the Income Statement, it covers a specific period of time. For companies using purely Cash-based accounting, there will be little difference between the Income Statement and the Statement of Cash Flow.
Subsequent installments of this series will explore each of these statements in more detail as well as some specialized reports most business owners use to monitor their financial health.
