BUSINESS FINANCIAL BASICS

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1 BUSINESS FINANCIAL BASICS HERE ARE THREE BASIC FINANCIAL STATEMENTS THAT ARE IMPORTANT FOR YOUR SMALL BUSINESS: BALANCE SHEET. P&L. CASHFLOW STATEMENT 1

2 BALANCE SHEET A financial statement captures a person s overall wealth at a specific point in time. As an equation, it looks like liabilities + owner s equity = assets. The two sides of the equation must balance out. ELEMENTS OF THE BALANCE SHEET: CURRENT ASSETS Current assets Include cash or other holdings that can quickly be converted to cash within a year. These may include inventory, prepaid expenses and accounts receivable. 2

3 ELEMENTS OF THE BALANCE SHEET: FIXED ASSETS Fixed Assets Machinery, equipment, land, buildings, furniture and other essentials that you are not planning to sell are considered ELEMENTS OF THE BALANCE SHEET: LIABILITIES Liabilities are what you owe. Liabilities can be broken down into current or short-term liabilities, such as accounts payable and taxes, and long-term debt such as bank loans or notes payable to stockholders 3

4 ELEMENTS OF THE BALANCE SHEET: LIABILITIES Remember that an asset can also be a liability. For example, a car with a value of $5,000 would be listed in the asset column. If there were an outstanding loan balance of $2,500, it would be reflected in the long-term liability column. Assets Liabilities = Net Worth ELEMENTS OF THE BALANCE SHEET: EQUITY Owner s equity includes any invested capital or retained earnings. If you captured all of your accounting information correctly, both sides of the balance sheet equation should be equal. 4

5 ELEMENTS OF THE BALANCE SHEET: EQUITY By completing a balance sheet, you can easily identify strategies to increase net worth. You should update your balance sheet at least once a year. Software can keep it perpetually updated. Quickbooks for example. PROFIT AND LOSS STATEMENT Also called P&L or income statement enables you to project sales and expenses and typically covers a period of a few months to a year. 5

6 PROFIT AND LOSS STATEMENT to determine net profit, subtract total operating expenses from gross profit. (Gross profit total operating expenses = net profit.) PROFIT AND LOSS STATEMENT: COST OF GOODS SOLD direct costs attributable to the production of the goods sold by a company gross profit is calculated as total sales minus the cost of goods sold. Costs of goods sold include things like raw materials, inventory 6

7 PROFIT AND LOSS STATEMENT: OPERATING EXPENSES expenditures that a business incurs to engage in any activities not directly associated with the production of goods or services overhead costs such repairs, utilities, insurance and legal fees PROFIT AND LOSS STATEMENT: TYPES OF OPERATING EXPENSES Fixed expenses recur at specific intervals. Rent and car payments are examples of fixed expenses. Variable expenses change over time. Examples of variable expenses are food and utilities. 7

8 PROFIT AND LOSS STATEMENT: TYPES OF OPERATING EXPENSES Once you have completed entering your income and expenses, you will need to determine if you have a monthly surplus (income exceeds expenses) or a deficit (expenses exceed income). PROFIT AND LOSS STATEMENT: TYPES OF OPERATING EXPENSES Having a budget and using a cash flow statement can help you anticipate shortages and surpluses. For example, in December your outflow will be greater than normal because you would like to purchase Christmas gifts. However, in the summer months your cash inflow may be higher because of a summer job. By using a cash flow statement, you can more easily identify the flow of income and expenses. 8

9 CASH FLOW STATEMENT This statement highlights how much money is coming in to (cash inflows) and going out of (cash outflows) your business. CASH FLOW STATEMENT: INFLOW Cash inflows include cash sales, accounts receivable collections, loans and other investments. Equipment purchased, expenses paid, inventory and other payments are considered 9

10 CASH FLOW STATEMENT: OUTFLOW Equipment purchased, expenses paid, inventory and other payments are considered cash outflows. CASH FLOW STATEMENT To calculate your ending cash balance, take the beginning cash balance (bank account on balance sheet), add cash inflows and then subtract cash outflows. 10

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