Here are three basic financial statements that are important for your small business:
Balance sheet. This statement provides an overall financial snapshot of your small business. As an equation, it looks like liabilities + owner’s equity = assets. The two sides of the equation must balance out.
There are two types of assets: current and fixed. Current assets include cash or other holdings that can quickly be converted to cash within a year. These may include inventory, prepaid expenses and accounts receivable. Machinery, equipment, land, buildings, furniture and other essentials that you are not planning to sell are considered fixed assets.
Liabilities can be broken down into current or short-term liabilities, such as accounts payable and taxes, and long-term debt such as bank loans or notes payable to stockholders. Owner’s equity includes any invested capital or retained earnings. If you captured all of your accounting information correctly, both sides of the balance sheet equation should be equal.
Profit and loss statement. A profit and loss statement, also referred to as an income statement, enables you to project sales and expenses and typically covers a period of a few months to a year.
To determine net profit, subtract total operating expenses from gross profit. (Gross profit – total operating expenses = net profit.) Remember that gross profit is calculated as total sales minus the cost of goods sold. Costs of goods sold include things like raw materials, inventory and payroll taxes. Make sure to also factor in overhead costs such repairs, utilities, insurance and legal fees into your operating expenses to ensure your net profit is accurate.
Cash flow statement. This statement highlights how much money is coming in to (cash inflows) and going out of (cash outflows) your business. Cash inflows include cash sales, accounts receivable collections, loans and other investments. Equipment purchased, expenses paid, inventory and other payments are considered cash outflows.
To calculate your ending cash balance, take the beginning cash balance, add cash inflows and then subtract cash outflows. (Beginning cash balance + cash inflows – cash outflows = ending cash balance.)