John Ingrisano here, on the mundane but necessary topic of bookkeeping. I know, most of us hate the paperwork part of business. But if we don’t do it right, not only will the IRS skin us alive, but we’ll have no idea how we are doing — sort of like playing baseball but not bothering to keep score.
So, like it or not, good financial records are crucial to the success of your business. They are the tools that help you track your company’s past performance and present financial health, plus set realistic goals for the future. Without them, you are flying blind, without a clue about your business’s financial condition.
Financial statements record the performance of your business and allow you to diagnose strengths and weaknesses by providing a written summary of financial activities. You don’t have to be a Harvard MBA to create and interpret financial statements. However, to truly maintain control of where your business is and where it is going, you need to learn the basics, which are easy to master.
The two primary financial statements are income statement and balance sheet. Examples of these documents, including actual forms that can be adapted to your company, can be purchased at business supply stores. Or go online to the Small Business Administration website (www.sba.gov) for free samples.
Getting started, gathering the data you need from all sources, may take a little time. However, before long, with just a few minutes a day and an hour or so each month, you’ll learn to rely on these valuable tools and wonder how you ever got along without them.
THE INCOME STATEMENT
Any business that pays taxes does some version of an income statement, whether a handwritten ledger or computerized accounting system. Also known as a Profit and Loss Statement, the income statement tracks the company’s business activity.
This document tabulates income minus expenses. It shows whether the business made a profit or loss for a specific accounting period. Some business owners record the numbers daily. The income statement helps business owners understand sales patterns — which products are selling, which regions are strong or weak, what days or seasons produce the most business. It also reveals expense patterns and can help identify cost-cutting areas. Most of all, income statements clearly show the business’s bottom line – the exact amount of profit or loss based on sales and the cost of bringing in those sales.
Too often, however, businesses never go beyond the income statement. That is why they find themselves surprised when financial troubles arise. Working with an income statement is fine when it comes to the company’s daily activities. However, the income statement only tells part of the story. That is where the balance sheet comes into play.
THE BALANCE SHEET
The balance sheet factors in the big-picture elements of assets and liabilities that show the business’s net worth and overall financial health. It provides a picture of the company’s true financial condition and direction. There are two elements:
1. Assets, defined as anything the business owns that has a monetary value. Assets include cash on hand, accounts receivable, the purchase price value of inventory, prepaid expenses, and fixed assets (real estate, equipment, machinery, furniture, and company vehicles).
2. Liabilities, debts owed by the business. These include accounts payable, outstanding loans and debts, such as lines of credit, mortgages and installment loans.
The balance sheet shows whether the business is profitable or slipping into debt. It lets business owners plan for the future. Can they reasonably make the decision to borrow money for a new sales campaign, expansion or product line? Or should they postpone the project and concentrate on reducing present debt load? Can they bring on a new employee or should they cut back on staff?
WHAT TO DO
1. Keep good records. They are the raw data that reveals your business’s true condition.
2. Record and review sales and expenses every day (never less than once a week).
3. Prepare an income statement and balance sheet report at least once a month.
4. Compare reports with those from previous periods, looking for patterns of activity, as well as discrepancies in certain areas.
Within a short period of time, you will recognize and be able to track areas of opportunity and concern, enabling you to make informed decisions. Most of all, you will find that your company’s financial statements are valuable tools that will help you guide your business to a consistently profitable bottom line.
So work hard. Make money. Have fun. And keep good records.
The Freestyle Entrepreneur
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