Getting to Know Your Business
Financial statements really are great storytellers. They tell you how much money you have, where it is and how it got there. They will tell you if your money is sick or sneaking out the window. They tell you many things about your business that will help you guide and prepare your business for the future.
How much money do you have?
This is easy. What you want to read is your Balance Sheet. Your Balance Sheet tells you what is the current status of your business. When you look at a Balance Sheet, you will notice it comes in three (3) parts. Assets, Liabilities, and Equity. Assets lets you know if your money is “liquid” (think dollar bills or something that can quickly turn into cash) or not (think real estate). You will see what you have in your bank, how much money customers owe you (Accounts Receivable) and how much inventory is in your storehouse. Your Total Assets is the total value of cash you have to work with.
Who owns this money?
Before you think, “Well, me, of course”, you may want to slow down a bit and consider the question. This is where Liabilities starts talking. It lets you know how much and who have a demand on your money. You can start with your Vendors (Accounts Payable), your Bank (Loans Payable), and don’t forget the Government (Tax Payable)!!
How much money is my company’s?
You can certainly think that you finally found the good news part of your story here. This is where you can see your initial investment and where your earnings accumulate. You can also see how much money has been withdrawn or if additional investments into the company have been made by you.
Why is this called a Balance Sheet?
One of the greatest inventions ever is the Double-entry accounting system. It is an organizing tool that helps minimize errors, create summaries, and show profit. Who doesn’t like seeing profits? The great formula that resulted from double-entry is Equity – Liabilities = Assets or more familiarly, Assets = Liabilities + Equity. Sample number translation: 4=1+3 (or 2+2 or 1+3) If you see this, you can trust the story you are being told more confidently.
How did the money get here?
The Income Statement is your next Story-teller. It will expose weaknesses and strengths of your company. The first section of an Income Statement is Revenue. The numbers here will tell you how much you sold during a specific time. The next section is Cost of Sales (or Goods). These numbers will tell you how much money it took to make your product. This includes materials, labor, freight and allocated overhead. Now you have Gross Profit. Gross Profit tells you how profitable is your product or service. Revenue – COS = Gross Profit
Where did the money go?
The next chapter is (Operating) Expenses. This is where the cost of running your business appears. It covers sales, marketing, insurance, payroll, rent, etc. Both Cost of Sales and Expenses tell you where the money is going after it arrives. When you read Gross Profit – Expenses = Net Profit, you will now see how profitable is your business. With this information you can strategize for the future. You can pinpoint weaknesses and nuture your strengths. You can see where you need to plan to improve the status of your business (Balance Sheet).
Did cash increase or decrease?
If you are using the Accrual accounting method, it is very handy to read your Cash Flow Statement. This little storyteller tells you if your cash increased or decreased and from what source; how much money was invested into your company and how much money was generated from operations or financing and how it was spent. This is a great supplement to your Balance Sheet and Income Statement.
Cash generated by or used in operating activities $ 37,529
Cash generated by or used in investing activities $(40,419)
Cash generated by or used in financing activities $ 1,444
Total (Decrease/increase in cash (& cash equivalents) $ (1,446)
Cash and cash equivalents, beginning of the year $11,261
Total (Decrease/increase in cash (& cash equivalents) $ (1,446)
Cash and cash equivalents, end of the year $ 9,815
The End
As you learn to read and understand the story your Financial Statements tell you, you will grow more confident in making your business a success and be prepared for whatever the future holds. This is really only the beginning.
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