Accurately tracking financial data is critical to the day-to-day running operations of your small business. It’s also essential when it comes to seeking funding from investors or private funders if you’re looking to take your business to the next level. Keeping a close watch on your finances can also help you ensure your products and services are priced right, identify what your margins are, determine your cash flow and make filing taxes easier.
Here are three basic financial statements important to your small business:
This statement provides an overall financial snapshot of your small business. As an equation, it looks like liabilities + owner’s equity = assets. The two sides of the equation must balance out.
Liabilities can be short-term liabilities, such as accounts payable and taxes, and long-term debt such as bank loans and notes owed to stockholders. Owner’s equity includes any invested capital or retained earnings. Assets can be fixed and current. Fixed assets include equipment, machinery, land, buildings, and other essential items you are not planning to sell. Current assets include cash or other holdings that could quickly be converted to cash.
If you captured all of your accounting information correctly, both sides of the balance sheet equation should be equal.
Cash flow statement.
This statement highlights how much money is coming into and going out of your business. Cash inflows include cash sales, accounts receivable collections, loans and other investments. Cash outflows include equipment purchased, expenses paid, inventory and other payments. To calculate your ending cash balance, take the beginning cash balance, add cash inflows and then subtract cash outflows. (Beginning cash balance + cash inflows – cash outflows = ending cash balance.)
Profit and loss statement.
A profit and loss statement, sometimes referred to as an income statement, enables you to project sales and expenses and typically covers a period of a few months to a year. To determine net profit, subtract total operating expenses from gross profit. (Gross profit – total operating expenses = net profit.) Gross profit is calculated as total sales minus the cost of goods sold. Costs of goods sold include things such as raw materials, inventory and payroll taxes. Don’t forget to factor in overhead costs such repairs, utilities, insurance and legal fees into your operating expenses to ensure your net profit is accurate.
If you need assistance preparing any of your financial statements, look no further than Randolph Business Resources. Our experienced staff is ready to lend a hand to you and your business.