If you own a small business, it’s vital that you stay on top of your finances. It will help you keep accurate records of your profits and expenditures. In addition, you’ll be thankful when it comes time to file your small business tax returns. The better records you keep, the more your small business will succeed.
There are numerous documents you need to know when owning a small business, but we want to focus on the three most important.
1. Income Statement
An income statement is meant to track your revenues and expenses. It will help measure your operating performance over time and also see which parts of your small business may be over or under budget.
Your income statement will itemize your revenues and your expenses. First, take care of your revenue streams and track your total sales (don’t forget to subtract any returns or discounts). Then, track the cost of goods sold. For a product-based business, this covers supplies, manufacturing and/or labor expenses. For a service-based business, it mainly tracks any employment costs. If you are a sole proprietor or DBA, this expense may be zero. When you subtract the cost of goods sold from the net sales, that will give you your gross profit.
Gross profit will not include any other operating expenses or income taxes, such as the following:
- Salaries/sales commissions
- Promotional materials
- Sales costs
- Any other overhead costs
Add all of these costs up to calculate your total expenses. Subtract that from your gross profit to determine your net income before taxes. When taxes are figured out, subtract those from that total and you will have your net income.
2. Balance Sheet
A balance sheet will show you the financial condition of your small business. Generally, it will reflect the closing of a specific accounting period. It is comprised of liabilities, assets, and owners’/stockholders’ equity in the company. Liabilities and assets are separated into long- and short-term obligations such as government securities, money market or checking.
Balance sheets should provide a bigger picture financial analysis of your business. They will identify trends, show how you are handling the natural ebbs and flows of expenses and revenues, and help you determine if you have enough operating capital.
First, determine your assets. You will categorize them based on current and long-term assets. Add these together to calculate your total assets. Second, measure the liabilities. This is comprised of current liabilities, long-term liabilities, owners’ equity, common stock and retained earnings. All together, these will show you the total liabilities and owners’ equity for your small business.
3. Cash Flow Statement
While the income statement and balance sheet are used to show the financial standing of a company, a cash flow statement (or statement of cash flows) is primarily used to track your working capital. How is your cash flow being maintained from month to month or any specific accounting period you wish to measure?
Start off by determining your cash balance at the beginning and end of an accounting period. Then, compare your income against all operational costs that require cash. If you keep an accurate income statement, it will provide all the information you need for this step.
In addition to your working capital, income and expenses, a cash flow statement will factor in your investments (equipment, property, securities and investments) and any financing activities (long-term debts, credits and dividends paid). Once you add up all the positive cash flow numbers (inflow) and subtract the negative numbers (outflow), you will have determined the cash flow for that particular accounting period. You can then compare against previous periods to measure your current operational stability or forecast future cash flow issues.
To learn more about how to prepare an income statement, balance sheet or cash flow statement for your small business—and to understand how they will help you come tax season—contact Ferguson, Timar & Company today.
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