Financial Statements For Small Businesses

Financial Statements For Small Businesses – Financial statements are like your company’s financial dashboard. They tell you where your money is going, where it’s coming from, and how much you have to work with. They are extremely useful for making smart business moves. And they are 100% necessary if you want to get a loan or attract investors.

If you’re looking for a good introduction to financial statements, read on. We’ll go over the basics of each financial report and how to read (and use) them to keep your business running like a well-oiled machine.

Financial Statements For Small Businesses

Financial statements are reports that summarize important financial accounting information about your business. There are three main types of financial statements: the balance sheet, the income statement, and the cash flow statement.

How To Make Sense Of Your Small Business Financial Statements

We’ll look at what each of these three key financial reports do and how they work together to give you a complete picture of your company’s financial health.

A balance sheet is a snapshot of your business’s finances as they stand today. It tells you about the assets you own and the liabilities (ie debts) you owe at a particular time.

How often your accountant prepares a balance sheet for you depends on your business. Some companies receive daily or monthly financial reports, some prepare financial reports quarterly, and others receive a balance sheet only once a year.

For example, banks handle a lot of money, so they prepare a balance sheet every day. On the other hand, a small Etsy shop may only balance every three months.

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But total assets can also include things like equipment, furniture, land, buildings, bond receivables, and even intangible assets like patents and goodwill.

Liabilities are debts you owe other people. In our balance sheet example above, the only liability is a bank loan. However, total liabilities can also include credit card debt, mortgages, and accrued expenses such as utilities, taxes, or wages owed to employees.

Equity is the remaining value of a company after deducting liabilities from assets. This can be retained earnings – the money the company has earned so far – as in the example above.

On the balance sheet, you’ll also notice a modification to equity, a withdrawal to stockholders of $7,380.58. This means that someone who owns part of the company has withdrawn some money from the shareholders’ equity. This is one way some business owners choose to pay themselves.

Solved Exercise: Constructing Financial Statements Two

Capital can also consist of private or public equity or seed investment from your company’s founders.

For example, let’s say you started an online store and put $1,000 into its bank account as working capital (to pay for web hosting and other expenses). Before you even make the sale, that $1,000 would be listed as equity on your balance sheet.

It is important to note that equity is only the “book value” of your company. It is not the market value of your business if you want to sell the business. When selling a business, buyers typically pay more than the book value of the business based on factors such as the company’s annual earnings, the market value of the tangible and intangible assets it owns, and more.

Here’s an example that explains how it works. Let’s say you have a food cart that sells vegan, organic, gluten-free vegetables.

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Pretty. You added $1,000 to your retained earnings by saving more money, even though your obligations didn’t change.

While a balance sheet is a snapshot of your business’s financial condition at a point in time, an income statement (sometimes called an income statement) shows you how profitable your business was during an accounting period, such as a month, quarter, or year. It shows you how much you earned (income) and how much you spent (expenses).

Cost of Goods Sold (COGS): The total amount it cost you to make the buns: bun sticks, locally sourced ingredients, etc. (here is a more complete explanation of COGS)

When you subtract COGS from revenue, you see how profitable your products are. This is very useful. In the example above, revenue is around 10k COGS, which is a healthy gross margin.

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If your COGS and revenue numbers are close, it means you’re not making a lot of money per sale.

It is profitable. You could kill every pepper, but you spend so much on advertising that you leave with nothing.

You sold $1,000 worth of glasses. If bagels cost $4 each (they are vegan, gluten-free, and organic, after all), that means you sold 250 bagels.

With this information, you know how much breadcrumbs you have left in your stash—and how much more you should be ready to make next July.

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What else? Here, apart from interest, there are two costs: electricity and maintenance. By looking at your income statements, you will be able to see which months you spend more on electricity and how often you need to pay for the maintenance of your cart.

Most importantly, you’ll be able to plan ahead for more expensive months (electricity-wise) and know roughly how much money you need to budget for maintenance.

To get this information, you need snapshots of your business’s finances. You get this from the balance sheet.

Most small businesses just keep track of their finances using balance sheets and income statements. But depending on how you prepare your financial reporting, you may need a third type of statement.

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A cash flow statement tells you how much cash has flowed into and out of your business over a period of time.

Statements of cash flows (also known as statements of cash flows) are usually prepared only for businesses that use the accrual method of accounting. This is because, under the arm’s length method, a company’s income statement may include revenues that the company has earned but not yet received and expenses that the company has incurred but not yet paid.

For example, under the accrual method, if you sold a $5 glass to a customer and accepted an I.O.U. as a payment, that $5 would show up as income in your income account, even if you didn’t receive the payment in your bank account.

A cash flow statement tells you how much cash you collected and paid out during the year. This can help you predict future cash surpluses and shortages and help you plan to have enough money to cover your rent or pay your heating bill.

Your Balance Sheet: Why It’s Important

A balance sheet might show that you have $1,000 in accounts receivable, and your income statement shows that you earned $1,000 in revenue. But if your clients haven’t paid you that money yet, you don’t have cash on hand. So the cash flow statement “corrects” the items—for example, by subtracting that $1,000 from cash on hand because it’s not yet available to cover your expenses.

Basically, this statement tells you that despite pretty good income and low expenses, you don’t have much cash flow from your normal operations – only $100 a month. Most of your money came from the proceeds of the bank loan.

To increase your company’s cash flow from operating activities, you need to accelerate the collection of your receivables. This could mean telling customers that you will only accept cash instead of I.O.U. or require your customers to pay your outstanding invoices within 15 days instead of 30 days.

Either way, your cash flow statement showed you a different side of your business—the side of cash flow that’s invisible on your balance sheets and income statements.

Business Financial Analysis

Once you get used to reading financial statements, they can be really fun. By analyzing your net income and cash flow and looking at past trends, you’ll begin to see many ways you can experiment with optimizing your financial performance.

Let’s say your stroller gets a flat tire every other month and you have to pay a $50 maintenance fee each time. That’s $300 a year (as you learned from your income statements).

But let’s say the cost of buying a new, high-end cart that has Kevlar tank treads instead of tires is $600. You can conclude that, over two years, it will pay off.

A person can only serve so many parrots. Let’s say you can’t meet demand during the busy summer months. The line at your cart gets so long some days, people get frustrated and leave before buying one of your toasts.

Chart Of Accounts For Small Business Template

At this point, it might make sense to hire another (seasonal) employee and get a bigger cart. But for that you need a loan.

Before lending you more money, the bank will want to know about your company’s financial position. They want to know how much you earn, how much you spend, and how accountable your company management is to your business finances. This information is a good indicator of whether you will be in business long enough to pay off your loan.

That’s when financial statements are invaluable. With properly prepared balance sheets and income statements, you are able to demonstrate that your business is viable — and get the resources you need to expand it.

Finally, without properly prepared financial statements, filing taxes can be a nightmare. Not only do financial statements tell you how much income to report, they also give you an overview of the expenses you’ve incurred—some of which

Things To Look When Managing The Company’s Financial Statements

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