Irrespective of your business growth, keeping financial records is important.
Record keeping will help you to know whether your business is profitable or not. If you do not know the difference between profit and revenue, you may start to spend your capital unknowingly.
These records will help you to know when to hire more employees and how to determine their salaries/wages. It will help you to detect theft earlier.
Whether or not you are able to hire an accountant, you should understand these basic financial statements.
Every business has 3 financial statements that answer 3 different questions.
1. Income Statement (Are you profitable?)
2. Balance Sheet (Are you healthy?)
3. Statement of Cash Flows (Where is cash going?)
- INCOME STATEMENT
This statement tells you whether or not you’ve made a profit over a given period of time.
The formula is: Revenue – Expenses = Profit
Expenses can be further broken down into two buckets:
- Cost of Goods Sold (cost related to revenue)
- Overhead expenses (cost required to run the business, but not directly related to revenue)
The income statement helps you to:
- Identify how much revenue you’re bringing in
- Understand if you’re making money on your product
- Identify if your fixed or overhead costs are too high
- Itemize your costs to make better decisions
- BALANCE SHEET
This statement tells your company’s financial strength at a specific snapshot in time.
The Formula is: Assets = Liabilities + Equity
Assets are what you own:
- Cash
- Accounts Receivable (money owed to you)
- Inventory (product in your possession but not sold)
- Fixed Assets (property, equipment, machinery, or vehicles)
- Intangible Assets (software, licenses, trademarks, or goodwill)
Liabilities are what you owe:
- Current Liabilities (owed in < 1 year)
- Accounts Payable (money owed to vendors)
- Credit Card Payables (just a different accounts payable)
- Short-term debt (obligations to pay)
- Long-term liabilities (owed in > 1 year)
Equity is how much the company is worth on paper:
- Money put in the business
- Money taken out of the business
- Earnings retained in the company
From the balance sheet you learn:
- How strong your business is financially
- Whether short-term obligations can be met
- The amount of debt your company has
- The book value of your company
- STATEMENT OF CASHFLOW
This statement helps you understand how cash has been spent over a period of time.
The formula is:
Net Increase or Decrease of cash during period + Cash at beginning of period = Cash at end of period
The net increase/decrease is broken down into 3 categories:
- Operating Activities (cash collected from sales versus cash paid related to sales)
- Investing Activities (new equipment purchased or sold)
- Financing Activities (change in debt or inflow of capital)
Analyzing this statement will show you:
- if your cash flow positive or negative
- why your cash flow is positive or negative
- whether operations is carrying its weight
- what investments or financing is costing
Kingsley Ndimele
Your Reliable Consultant