The Balance Sheet
Ok, let’s start with this. All financial statements are based on this evergreen equation, that is the key to life and all wealth and happiness and unicorns and tiaras and everything good in the world of businesses.
That equation is: Assets = Liabilities + Owners’ Equity
An asset is a resource owned by an individual or company that exists under the expectation that it will generate cash. For example, accounts receivables (payments owed to you) and property are assets.
A liability is a legal obligation or debt owed to another person or company. Those credit card balances and business loans are liabilities because you owe it back (nope that ain’t yo money child).
Lastly, the owner’s equity (sometimes referred to as sharholder’s equity) is the amount of money that would be returned to shareholders if all assets were liquidated, or converted to straight cash. The higher the number indicates business is good and celebration toasts need to be made.
These three pieces of the equation are related and affect each other.
The Income Statement
The income statement displays your revenue and expenses. The net amount is either profit (positive number) or a loss (negative number.). It’s basically your financial report card. An A+ grade is an increasingly positive net income meaning you’re bringing $$$ year over year. A positive net income means the firm is making money. A negative net income means the firm is losing money. An accurate income statement is only made possible by keeping logs of your purchases and sales throughout the year.
The Cash Flow Statement
Once you have your income statement, you can then create the cash flow statement. This reveals the value of a company’s assets that are cash or can be converted into cash immediately. This is sooo important because this will accurately determine how much cash or cash equivalents you have. A lot of business owners look at their sales numbers or income and think they hit the jackpot, but you have to investigate further to get an accurate view of your success.
Ok, whew! That’s it. Once you understand these financial reports, you can create an essentials business plan. I want to be clear, understanding what these statements are isn’t the same as interpreting them – be sure to get an accountant or finance professional to break down, analyze and help you make profitable decisions.
To more money in our pockets,
Chika
8 Easy & Effective Tax Write-Offs for Creatives & Service Providers
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