Basic Financial Management
There are three (3) major types of financial statements business owners need to understand: the balance sheet, the income statement and the statement of cash flow. These statements are found in business plans, and are essential documents when the goal is to apply for financing.
1. Balance Sheet
The Components of a balance sheet are:
B. Liabilities - what the company owes to persons other than its owners. It also consists of both current and fixed portions.
C. Capital or Equity - The difference between assets and liabilities. In other words, the amount left over after you deduct what you owe from what you own is what you are worth. This is sometimes called proprietorship, equity or net worth. It is the capital originally invested in the business with additons or substractions. Additions may come through new money invested in the business or through retention of some of the profits. Subtractions may come through withdrawal of some of the money from the business or through losses.
A balance sheet is required when applying for a bank loan. For your own purposes, the balance sheet provides a wealth of information vital to the health of your business.
What the company has done with money = Where the company's money has come from. The two sides must equal and the equation must balance, hence the name "Balance Sheet".
2. Income Statement
The components of an income statement are:
Revenue-represents the total amount of sales to customers (includes gross revenue from sales, royalty income, less discounts, allowances, returns to arrive to net revenue)
Expense- includes all of the expenses incurred in carrying on a business during the year, such as wages and commissions; freight, trucking and express; printing and supplies; heat, light and power; rent; insurance; and telephone.
The formula to determine your net profit or loss is:
3. Cashflow Statement
Most business experts agree that you should do your cash flow analysis and cash flow projections monthly. It forces you to be more realistic and disciplined in your thinking and keeps your attention focused on the bottom line. A cash flow analysis shows
If you project your cash flow, you can see the effect of a loan on your business fare more clearly than from the income statement. A cash flow statement deals only with actual cash transactions. Depreciation, a non-cash expense, does not appear on a cash flow. Loan payments (including interest) on the other hand, do, since they represent a disbursement.