The box scores that show everyone how your small business is doing financially are its financial statements. They normally feature two reports that describe the tale of your finances: The Balance Sheet and The Profit and Loss Statements. For a complete understanding of the financial situation, the Cash Flow Statement is crucial.
Your balance sheet, income statement, and cash flow statement are the three crucial financial statements for managing your small business. You can view a breakdown of how they function, what makes up each one, and how they impact your small business here.
A balance sheet keeps track of your company’s assets, liabilities, and owner-held equity at any one time. It’s significant since it provides an estimate of a business’s cash value. It can be used by partners to value shares, and lenders can use it to evaluate risk and collateral, which can affect your chances of getting finance for your small business if you ever need it.
Let’s examine the main data points on a balance sheet.
All things that the company owns outright, and their worth are its assets. Assets include things like inventory in a showroom and a recently agreed-upon five-year service agreement. Current and long-term assets are two different categories.
Assets with a lifespan of one year or less are referred to as current assets or short-term assets. Cash, merchandise, and pre-paid expenses like insurance are a few examples. Long-term investments are exactly what their name implies—assets with a longer time horizon. Equipment, tools, and property that belongs to your small business are a few examples. Non-tangible assets like patents, trademarks, and copyright are more examples.
Liabilities are any debts owed by the company to creditors or vendors who have paid for goods or services that haven’t yet been delivered or rendered. Liabilities include things like the remaining balance on a business loan and the outstanding balance on merchandise in a warehouse. Liabilities come in two flavors: short-term and long-term.
Current liabilities are debts that need to be repaid immediately. Payroll, credit lines, and small company loans are a few examples. Long-term obligations may be paid off over a longer time frame. Larger debts like mortgages and deferred income taxes are a couple of examples.
An income statement is a summary of revenues, gains, costs, and losses for a specific period. It’s significant since it shows how profitable a company’s current operations are. This can notify you of prospective loan decisions as well as direct management in terms of how to increase or decrease activities for greater profitability.
An income statement’s important information includes:
The “on-paper” money from accounts and operations is known as revenue (for instance, a sale of EUR 10,000 that will be paid over a year). There are two different kinds of income: income from primary activities and income from secondary activities.
Operating costs like sales or rendered services are included in primary activities. Rent from a vacant space or earning interest on dormant cash are examples of secondary activities. In essence, ancillary activities generate income independent of running costs.
Gains come from other sources of income in the future, such as a lawsuit that is successfully resolved, or from selling your assets. You use the following formula to record your gain on your income statement: Gains are calculated as the difference between the sale proceeds and the asset’s value as recorded in your books.
Consider that you run a retail business and decide to sell some extra stock. On your books, you paid EUR 1,000 for the inventory, but you upsell it for EUR 1,500. Your profits would total EUR 500 as a result.
Cash flow statement
This statement provides a thorough accounting of all the cash received and spent over a given time frame. It differs from the income statement because the income statement displays accrual-basis business revenue.
It displays the real inflow of funds into the accounts of your small business. It is crucial because it informs management of the amount of cash available for paying bills and making investments in the company. Large differences between your company’s income statement and cash flow statement can potentially reveal operational issues.
Key information on the statement includes:
Operating cash flow
Cash paid to and from your account as a result of ongoing operations is known as operating cash flow. For instance, a gymnastics academy receives monthly checks from students that serve as operating cash flow. Another illustration is buying a few cases of coffee for your coffee shop or a few dozen garments for your retail store.
Investing Cash Flow
Cash flow from investments is the revenue and costs associated with purchasing and disposing of assets like real estate and operating equipment. Selling an unused fleet car as an example generates positive investing cash flow but purchasing a new machine press to increase production generates negative investing cash flow.