By Jay Thompson
Financial statements
business Bitz
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It often amazes me how many small business owners cannot read their own company financial statements. You do not need a Ph.D. in accounting to successfully operate a small business but any business owner who wants to grow their business should, at least, have a basic understanding.
There are two basic Financial Statements that you need to be familiar with, the Balance Sheet, and the Profit & Loss Statement or P & L.
Balance Sheet
In school, you got a report card grading your performance. In business your balance sheet is your report card and your grade is the “bottom line.” The Balance Sheet shows the financial makeup and standing of the company at a particular point in time. This is usually month-end or could be quarter-end depending upon your business. It is a tally of every transaction that company has done from the first day in business to present. The Balance Sheet summarizes everything that has happened.
The Balance Sheet is made up of three categories, Assets, Liabilities and Net Worth
• Assets – Are the things the company owns: Cash, Accounts Receivable, Inventory, Real Estate, Equipment, etc. If you were pre-paying anything, such as insurance or some other purchase, you would also post an asset entry.
• Liabilities – These are the debts of the company: Accounts Payable, Bank Debt, Loans, etc. They are split up between Current Liabilities and Long-Term Debt. Current Liabilities are the money due within the current fiscal year and Long-Term Debts are amounts due beyond the current fiscal year.
• Net Worth – This is the Owner’s Equity. This is any money or other assets invested in the company minus any payout to the owners plus the net total of all annual profits since day one plus the total of profits in the current year.
The total Assets equal the total of liabilities plus net worth.
Assets= Liabilities + Net Worth.
Next is the Profit & Loss Statement or P & L:
The P & L shows all of the Revenues and Expenses for the current year or, in other words, the company’s profitability.
• Revenue – this is the money generated from the activities of the business.
• Expense – This is the money spent creating the revenue for the business
• The bottom-line number is Net Profit, which equals all Revenues less all Expenses.
Remember that the Balance Sheet shows all transactions of the company.
• The Net Profit total of the P & L flows to the Balance Sheet as the total Current Year Profits in the Net Worth section. At each year-end, the P & L will zero out to start a new year.
• On the Balance Sheet, the current year profit in the Net Worth section transfers to the Retained Earnings total and the current year profit value goes back to zero for the start of a new year.
It sounds confusing but is really quite simple once you get the hang of it.
Now, the most important part of the Balance Sheet and the Profit and Loss Statement is making sure you are recording all the transactions of your business in a timely manner. This makes having a good bookkeeping system in place a must! It might sound like a lot of work, but the benefits will be worth it. It will provide you with an accurate picture of what your company is doing. It will help you in making strategic business decisions. It will save you money in professional fees and it will help you locate where money is being wasted.
Jay Thompson is a Business Consultant with the CSU Bakersfield Small Business Development Center. The CSUB SBDC provides premium, one on one, no cost consulting to small business owners in Kern, Inyo and Mono Counties. For more information visit their website at http://www.csub.edu/sbdc.
