Business Financials
November 26, 2008
One of the major components in the successful operation of any small business is an understanding and utilization of key financial information. The documents usually associated with financial reporting include the Balance Sheet, Cash Flow Statement, and Statement in Income and Loss. One other statement, The Statement of Changes in Shareholders’ Equity is used more commonly in businesses structured as a corporation, but can also be used in any business where more detail about the owner’s equity is desirable.
Balance Sheet
The Balance Sheet is set up in the same way as the basic accounting equation, i.e. Assets = Liabilities + Shareholders’ Equity. In other words, if all the assets of a business were sold off at the listed value and all the debts or liabilities were paid off with the proceeds, the amount left or shareholders’ equity is the value of the business.
Assets are anything of value that a business owns. This can be things like office space or computers, or the paper and pens in the supply cabinet. It can also include intangible things like goodwill in the community, trademarks, copyrights and trade secrets. Assets are usually listed on the balance sheet in the order in which they will be converted into cash. Current assets include cash and inventory items which are expected to be sold within one year. Non current assets are intended to be sold, but will generally require more than one year to accomplish the task. The third asset category is Fixed Assets which are those items used in the operation of the business and are not intended to be sold. This might be vehicles, buildings or equipment.
Liabilities are debts owed by the business. They are usually listed according to their payoff dates. Current liabilities are expected to be paid off within the year. Long term liabilities have a payoff schedule beyond one year.
The shareholders’ equity is the amount invested in the business by the owners, plus or minus the earnings or loss since the beginning of the period. Income can either be distributed as dividends or retained as an increase in equity.
Income Statement
The income statement begins with the gross revenue or total income from sales and reduces it by all decreases to revenue first. Reductions to revenue include sales returns and cost of sales to arrive at gross margin. The gross margin is reduced by expense and expenditure categories such as operating expenses and depreciation. The resulting figure is known as income from operations.
Most companies then account for interest income and income expense before arriving at the taxable income figure. Once income tax is subtracted, you have the net income which is often further shown as an earning per share. This is the net income divided by the number of outstanding shares.
Cash Flow Statement
This statement identifies three major sources of cash income and output in order to ensure that the business has enough cash to operate. This is recognition that a company can make a profit as shown on the income statement, but still not have enough cash to get from day to day. The cash flow statement usually consists of three major parts: Cash from Operations, Cash from Investing Activities and Cash from Financing Activities.