WHY SHOULD SMALL BUSINESSES UNDERSTAND FINANCIAL STATEMENTS?
Even though we can assume that most business owners understand financial statements, the sad fact is, most of them don’t utilise them to manage their business.
Nonetheless, knowing what the numbers represent and what they are telling you can allow you to succeed on purpose. The definition of business success means to achieve growing and sustainable profits. Without sustained profits, you can eventually run out of cash and consequently get out of business.
Therefore, this week’s ‘Cija Ngebhizinisi’ radio programme will focus on financial statements;
1. Income/Profit and Loss Statement
2. Balance Sheet Statement
3. Cashflow Statement.
1. Profit and Loss Statement
An income statement, also known as a profit and loss statement, shows how profitable your business was over the course of a specific accounting period. One crucial thing to be aware of when drafting an income statement is the difference between revenues and receipts.
Revenue is money that your business has earned during the reporting period. Whereas, receipts are when the money is paid to you. Creating an income statement requires some basic math. The formula looks like this:
If there is a surplus after you have completed the calculation, this is your net profit. If you get a negative number, then this becomes your business’ net loss.
Revenue refers to money that is payable from the sale of goods and services, as well as interest received for a loan that the business has made to someone else, or gains earned in connection with the sale of a business asset. Depending on how your business is structured and what your overhead costs are, your expenses may include any or all of the following:
• Rent or lease payments
• Employee wages and benefits
• Advertising costs
• Travel expenses
How to make a Profit and Loss Worksheet
1. Make sure you record each and every transaction throughout the month, quarter or year that you plan on analysing. Store receipts and invoices, track your expenses on everything business-related, and make sure that you have all of the relevant information that you need to give yourself an accurate snapshot of your financial standing.
2. Find a free template online to do the work for you. Here are some of the top-rated templates;
• Microsoft Office Profit and Loss Template.
• Google Sheets Profit and Loss Template.
• QuickBooks Resource Centre. You can find and tweak any template that suits you-just make sure it comes from a reputable source.
2. Balance sheet
To put it simply, a balance sheet is a financial snapshot of your business at a specific point in time. For example, you may put together a balance sheet at the end of the fiscal quarter to get an idea of what your starting point is going into the next quarter.
A balance sheet, sometimes referred to as a statement of financial position, focuses on three distinct aspects of your business;
Assets are things that your business owns, such as equipment, inventory, and accounts receivables or cash.
Liabilities are many monies owed by the business. They maybe short-term or long-term, depending on how they are classified on the balance sheet. Accounts payable, outstanding payroll, and taxes could all fall under the heading of short- term liabilities. A long-term liability would be something that you are making payments against over time such as a business loan or credit card balance.
Equity is what you as the owner, you are able to claim ownership of, once any liabilities are deducted from the business’ assets.
3. Cash flow statement
The cash flow statement summarises the amount of cash and cash equivalents entering and leaving a company. It measures how well a company manages its cash position, meaning how well the company the company generates cash to pay its debt obligations and fund its operating expenses. The cash flow statement complements the balance sheet and income statement.
The main components of the cash flow are;
• Cash from operating activities- sales of goods and services, interest payments, Income Tax payments, payments made to suppliers, salary and wage payments, rent payments, and other type of operating expenses.
• Cash from investing activities- purchase or sale of an asset, loans made to vendors or received from customers or any payments related to a merger or acquisition.
• Cash from financing activities- cash from investors or banks, and cash paid to shareholders.
• Disclosure of noncash activities.
>> Quote of the week
“If you don’t have regular and accurate financial statements, you are driving your business 100 miles an hour down a one-way street the wrong way, at night, in the fog, without lights.” –Jim Blasingame.
• Email: firstname.lastname@example.org.
• WhatsApp: 7811 2899