Understanding Financial Statements for Small Businesses
Writing financial statements can be daunting, especially if you’re a small business owner. Maybe working with numbers and spreadsheets isn’t your area of expertise, or maybe you’re just new to all of this and need some help getting started. “What goes into a balance sheet?” “What do I count as an asset?” “How should I categorize these expenses?” This short post will take you through all the basics, with examples, so can conquer the paperwork and get back to doing what you love.
Financial reports and statements are important tools that help business owners understand the financial health of their companies. They provide information on a company’s revenues, expenses, assets, liabilities, and cash flow, and can be used to calculate key financial metrics like the net profit and the net value of the company. By preparing these documents, small business owners can stay on top of their finances and make informed decisions about their companies.
Types of Financial Documents
One of the tricky aspects of financial documents is that there are several kinds, and they often contain some of the same information. This seems redundant at first, but different documents have different purposes. Each one presents its information in a way that’s easy to read and understand for the given purpose.
This post will cover the three most-used financial documents: balance sheets, income statements, and cash flow statements. See other less common but very useful financial statement samples.
Note: Big E-Z Accounting handles the redundancy for you. Enter your information once at the beginning of the year. Then, enter new figures as needed, and Big E-Z will generate multiple documents using the same source of information, saving you time and ensuring accuracy.
See other common financial statements that small businesses and nonprofits use.
The Balance Sheet
The most common type of financial statement is the balance sheet. This document reports the financial health of a company on a particular date. It’s conventional to prepare one at the end of each year, but businesses often write them at various points within the year as well, as a way to verify that everything is accounted for.
The balance sheet shows a company’s assets, liabilities, and shareholder equity at a specific point in time.
Assets are anything of value that the company owns: that includes things like savings accounts, investments, as well as equipment and real estate.
Liabilities are a company’s financial obligations (debts). They include things like taxes owed, mortgage, and other loans.
Shareholder equity is the amount of money held by all shareholders. In other words, it’s the total value of the company. This number should be the same as the assets minus the liabilities. So, when Shareholder equity = Assets – Liabilities, then your books are balanced
It can be hard to remember all the categories of assets and liabilities. Big E-Z provides pre-formatted sheets that are customized to your business type, so you won’t leave anything out.
Income Statement
The next type of financial statement is the income statement, also called the income & expense statement or profit & loss statement. This document shows a company’s revenues and expenses over a specific period of time, typically a quarter or a year. It includes information on sales, cost of goods sold, operating expenses, and net income. It’s used to determine how much money a company is making and how much it’s spending. Ultimately, it gives you the company’s profit margin – the percentage of revenue left over after all the expenses have been paid.
Cash Flow Statement
The third type of financial statement is the cash flow statement. This document shows the overall cash movement into and out of a business, usually over a monthly period. It gives a detailed breakdown of cash transactions so you can assess the profitability of different business activities and identify potential cash flow problems.
The cash flow statement is broken down into three sections: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.
Operating activities, the most common, are the ordinary day-to-day transactions of the company. They include inflows from sales, as well as outflows from wages, overhead expenses, and taxes.
Investing activities are the buying and selling of investments such a real estate, equipment, or shares of other companies. This section, combined with operating activities, shows how much of a company’s income is due to investing in appreciating assets, versus buying assets that generate income.
Financing activities mark the cash flows due to your company selling shares or debt to others, or buying back shares / repaying debt / issuing dividends. This section shows how the company is financed, from external sources like debt versus internal sources like retained earnings. It also shows how the company’s dividend or stock buyback policies would affect its cash position.
Big E-Z’s Direct Cash Flow document comes with more features than the standard cash flow statement. It compares the summarized cash flow to the starting and ending balances of the year, in order to verify that the books are balanced. It also breaks cash flow down by month so you get a more granular look at your data.
Others
In addition to these main types of financial statements, there are other documents that may be helpful to a small business. These include:
Budget: A budget is a financial plan for a company that outlines expected revenues and expenses for a specific period of time, usually a year. It’s used to help a business manage its cash flow and to identify potential financial problems.
Invoice history: An invoice history document is a record of all the invoices that a company has issued to its customers. It typically includes information such as the invoice number, the date the invoice was issued, the customer’s name and contact information, the total amount due, and the due date for payment.
Sales tax: This is a spreadsheet that a business can use to track the taxes it owes for the sales it has made. It ensures that the business won’t face any surprising fees or penalties when taxes are due.
Big E-Z helps you write all of the above documents, and more. Subscribe by email to access the full list of sample financial documents.
Conclusion
In summary, financial reports and statements are important resources for small business owners, as they measure the financial wellbeing of the business and provide important information for high-level decisions. Big E-Z Accounting takes all the guesswork, memorization, data entry, and formatting off of your hands, so you can get your own financial statements quickly and painlessly.
