Accurately monitoring financial data is not only important for running the daily operations in your business, but it is also vital if you require funding from investors. Tracking your finances can also help to make sure your products and services are correctly priced, determine your cash flow, know what your targets are, and make filing taxes easier.
Listed below are three basic financial statements that are important for your small business:
- Balance sheet
A balance sheet gives an overall financial snapshot of your business. It equates to liabilities + owner’s equity = assets. The two sides of the equation have to balance out.
There are two types of assets in business – current and fixed. Current assets can be cash or other things that can be converted into cash within a year, which includes prepaid expenses and accounts receivable. Fixed assets can be machinery, equipment, furniture, buildings, land, and other things that you are not planning to sell.
Liabilities can be short-term (accounts payable and taxes) and long-term debt (bank loans, notes payable to stockholders). The owner’s equity can include any retained earnings or invested capital. If all of your accounting information is correct, both sides of the balance sheet equation should be equal.
- Profit and loss statement
Also referred to as an income statement, a profit and loss statement enables you to project sales and expenses, covering a period of a few months to a year.
You subtract total operating expenses from gross profit to determine net profit (gross profit – total operating expenses = net profit). Remember that gross profit is calculated as total sales minus the cost of goods sold. The costs of goods sold can include raw materials, inventory and payroll taxes. Factors in overhead costs such as repairs, utilities, insurance and legal fees should also be included to make sure your net profit is accurate.
- Cash flow statement
Your cash flow statement highlights how much money is coming in to (cash incomings) and going out of (cash outgoings) your business. Cash inflows can be 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 minus cash outflows. (Beginning cash balance + cash inflows – cash outflows = ending cash balance).