Many business owners/entrepreneurs ask me why the financial statements for their business are so important. Honestly, that is a wonderful question and I am excited to share a little about these valuable statements.
When you hear the words "Financial Statements" from an accounting professional, tax professional, loan officer or anyone else, there are 2 main statements that can be included in this group.
Profit and Loss Statement (aka Income Statement)
Most business owners/entrepreneurs have heard of the Profit and Loss Statement also known as the Income Statement. On this particular financial statement, you will find your income and expenses. These will include items like sales of product or services and other income such as cash back bonuses, rebates, etc. Your business expenses will also be on this financial statement. These can include items such as office supplies, software, payroll, employee safety gear, vehicle maintenance, utilities, cost of good sold or cost of services sold, etc.
A business owner/entrepreneur needs to know and understand their income(s) and expenses so they can understand their profit. The Profit and Loss Statement will show the difference between your Gross Profit (before any expenses) and your Net Profit (after your expenses are deducted) and thus will show you if you made a profit or if you actually took a loss (spent more money than you made). This is why I often tell people that just because you have money in the bank, does not mean your business if profitable. Being able to look at and understand a Profit and Loss Statement is so important to a business owner/entrepreneur.
The second financial statement is the Balance Sheet
The Balance Sheet tells you, the business owner/entrepreneur, what you have in assets, liabilities and owner's equity. (Definitions of assets, liabilities and owner's equity below.)
Assets can include accounts receivable, bank accounts, equipment, buildings, vehicles, and other items owned by the company. Liabilities can include accounts payable, business loans, company car loans, equipment loans, company credit cards, and lines of credit.
To be honest, trying to completely explain any part of accounting in a blog post that is only a 3-5 minute read is sort of like explaining how rockets fly in a 30 minute presentation. It can be done (well maybe, I don't actually know if you can explain how a rocket flies in 30 minutes) but you have to leave out a lot of pieces of the full picture. So let me just say that if you actually want to look at your business and see what it costs you to run it, how much money you are really making or where you can improve your net profit, learning to understand your Profit and Loss Statement and Balance Sheet is a great start!
Knowing a little information about these two financial statements will also help you make solid financial plans for your business and where you want it to go. I think most, if not all, business owners/entrepreneurs dream of expanding and growing their business. That usually takes money, whether reinvesting your profit or applying for a business loan. Financial statements that are accurate and clean will be a tool to help your achieve your dreams and plans.
I hope this short explanation on the Profit and Loss and Balance sheet is helpful to you. If for some reason, you find this post "clear as mud", feel free to contact me for a free consultation on your bookkeeping needs. Maybe I can help you.
In the meantime, here are some fun and exciting accounting terms to chew on for you! (OK, I know accounting is not as fun for everyone as it is for me. I guess I truly am an accounting geek!)
An asset is any resource owned by a business or an economic entity. It is anything that can be owned or controlled to produce value and that is held by an economic entity and that could produce positive economic value.
A liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events.
Owner's Equity is the claims by an owner against the assets of a business.
If you have any further questions about this or other bookkeeping subjects, please contact me at Rebecca@RHBizSolutions.com. I look forward to talking to you about your bookkeeping needs.
Here's To Your Success!
RH Business Solutions