The 3 financial statements & what your Accountant didn't tell you.
Updated: Oct 29, 2020
The 3 Financial Statements & What Your Accountant Didn’t Tell You.
Every business owner should be familiar with the three basic financial statements. At some point in your entrepreneurial lifetime, one of your accountants should have gone into detail on the WHY’s of your:
1. Balance Sheet
2. Income Statement or also known as your Profit & Loss.
3. Cash Flow Statement
I have seen the majority of business owners from small mom & pops to revenues over $10 million not use their financials the way they should and could be.
Let’s start with the basics – the formulas for each and then explain them.
1. Balance sheet = Assets = liabilities + equity
2. Profit & Loss or Income statement = revenue minus expenses = profit or loss
3. Cash flow statement is cash now vs cash last month. Beginning cash, ending cash, plus receipts, - disbursements is the cash position
First off, why is each important? Are any more important than the other? I guess the answer here is yes – the cash flow statement. I have seen more business fail due to not knowing their cash position than any other reason. I also very rarely ever see business owners using a cash flow statement. Is it their fault – no!! Usually they have never been shown what it is or what it does or how to do one!
But I digress – lets’ get back to why each is important
Cash Flow Statement- tells you if you have money to work with. Kinda important. Can you pay the bills and employees and if yes which ones and who first and when! Can you purchase that item you need now or will it have to wait even though it is in your budget for the month? This is the one I rarely see used properly. Look for an upcoming webinar on the how to create one for your business
Income Statement = tells you if you are making a profit. This is great to know on a month to month basis but without the Cash Flow statement – you may be spending money you do not have.
Balance Sheet is how healthy the business is or what it is worth. It is a snapshot that day of how financially healthy the business is or at least what equity there is. For the real value of your business – see our profitization blog
Many times I will see a business owner attempting to use a profit & loss statement to manage cash flow or decide when to make purchases or invest monies into the business. This is a bad idea! You may have a great profit in said month but may actually not have the case to make the purchase and meet the businesses other financial needs. Huge multi-million dollar business have failed doing this so don’t feel bad if you are.
Finally let’s once and for all give you the correct definition of which accounting method works best for your business.
Accrual Method: Most accountants recommend this one. The sale is made but you do not receive the money until next month – the sale is posted in your accounting system when the money is received, not when the sale is made. You can post the sale so you know it happens as a means to track the sale
Cash method. This would be for a retail type store. The sale is made, the money is received and the sale is posted for that day. Simple.
Join us for an upcoming webinar where we go into detail of all of the above but in a way that is meant for a business owner, not an accountant. I promise you will get a great benefit from knowing it AND being able to apply it to your business.