 Written by Kendall Martis and Alyssa Riker There are many different financial statements, each highlighting different areas. All of these statements talk to each other, meaning that certain information comes from one statement and then shows up on another. The three most important in the business are the profit and loss by class, balance sheet and cash flow. These statements show a snapshot of what your business is doing. Profit & Loss Statement (also called P&L or Income Statement)  A normal profit and loss statement is important for entrepreneurs because it can help you measure your business performance. For most entrepreneurs and startup companies, they will rely on grants and outside funding to cover expenses, and each grant or source of funding will have stipulations as to what their money should be spent on. A profit and loss by class statement allows companies to see how much money from each grant is spent on expenses. Therefore, it is important to classify expenses, to show which grant is being spent. At the end of the month, when looking at the profit and loss statement by class, there will be a journal entry that will debit unearned grant income for the total amount of expenses classified to each grant with a credit to grant income. By doing this journal entry, the income is reduced to only the total of the expenses, which shows the net income as zero. The journal entry is important because it removes any net loss or gain from the profit and loss statement, and it also will show the amount that is left in the grant. The bottom line of the profit and loss statement shows your net income, or how much money you have left over for the month. If this number is positive, the company made money that month, but if it is negative, the company lost money. When your only source of income is grants, this amount will almost always be zero. This amount shows up in the balance sheet under shareholder’s equity. Balance Sheet  The balance sheet lists in detail a business’s assets, liabilities, and value of shareholder’s equity at any specific point in time. The liabilities and shareholder’s equity will always be equal to the assets, hence the name balance sheet. The balance sheet is an important financial statement for all businesses because it provides a snapshot of the financial health of the business at a specific point in time, such as at the end of the month, quarter, and year. It is important for companies to know how their assets, liabilities, and owners’ equity stand at all times because you need to know if the amount of money you owe, is more than what you have and what the current value of your assets is. Being able to prepare and present the balance sheet is very important for entrepreneurs because it allows interested investors and potential lenders to have a good idea of the company’s financial position. Some benefits of the balance sheet to entrepreneurs include being able to spot problems in advance and allowing companies to keep track of finances at any point, determining risk and return by monitoring current and long-term assets, keeping an accurate balance on financial obligations, closely monitoring debt levels at any time, and showing how much capital the business has and what the true net worth of the business is. The balance sheet is seen as a tool that can aid in decision making when it comes to evaluating how well your business goals are being met and what areas need improvement. Cash Flow Statement
The final financial statement is the cash flow. This statement shows the bank balance as well as what your upcoming expenses are. Entrepreneurs should look at this statement to see what expenses occur monthly, such as rent or a subscription, versus one-time costs such as the purchase of equipment. This is especially helpful when you are interested in seeing what your runway is with your current money. Additionally, you can plan on when it makes most sense to purchase those one time items and how it will impact your funds on hand. If you’re interested in learning more about financial statements, including what specific lines entrepreneurs should look at most closely and how you can use the statements to calculate financial ratios that tell you more about your business’ financial health, you might want to check out:
0 Comments
Leave a Reply. |
RSS Feed