SCORE Small Business Blog

3 Basic Financial Statements You Need to Keep Track of Your Money
8 Comments

Who keeps track of your business numbers? It’s easy to just say, “I’m a craftsperson and I know my craft and that’s all I need to know. I’ll just hire someone to take care of the numbers for me.”

The truth is, if you are in charge of making decisions about your business, then you need to understand the basics of accounting and what each of the financial reporting statements you receive as a small business owner means. In other words, even if you let someone else keep the books for you, you need to understand the meaning behind the math.

Here are a few reasons why you have to keep accurate books; and you’ll notice that tax reporting is at the bottom of the list. Keeping accurate books will help you:

  • Price your products accurately.
  • Know if you’re making or losing money—in general and on specific jobs.
  • Know your cash flow—both in the short and long term—and work with bankers and investors.
  • Let the tax agencies know how you’re doing.

The important thing in accounting is to not let the terms and formatting of the financial information intimidate you. All you need to remember is that you need three basic financial statements to keep track of your money:

  1. The balance sheet shows your business at a particular point in time and outlines the assets you have and who owns them. Information on cash and earnings included in the balance sheet is drawn from the other two statements.
  2. An income statement shows your earnings over a period of time.
  3. The cash flow statement shows cash coming in and going out and what the net result is over a period of time.

Let’s take a look at this, broken-down in simple terms.

1. The Balance Sheet

As mentioned above, your balance sheet outlines your business assets, both current and fixed. Current assets are cash or other assets that can be converted into cash within one year (things like accounts receivable, inventory, prepaid expenses, etc.). Fixed assets are property and equipment owned by your business—things that you don’t intend to sell (furniture, manufacturing equipment, real estate, etc.).

As you create your balance, remember that the left side will always equal the right side. If they do not equal, then you have made a mistake. It is that simple. This is called the “accounting equation.” It’s what makes your balance sheet always equal on both sides. The equation is this: Assets = Liabilities + Owner’s Equity

Here’s a sample balance sheet:

balancesheet

Owner’s Equity covers the share of the business that you or other partners own.

2. The Income Statement

The second piece of essential accounting information you need is an income statement (or profit and loss statement), which is used to track sales and expenses. The difference between these two is your net profit. The formula for calculating this is: income minus cost of sales equals gross margin, and gross margin minus fixed operating expenses equals net profit. Remember, larger assets may be depreciated so that those bigger expenses don’t skew your profitability numbers.

It is important to remember that your income statement presents sales and expense activities over a period of time as opposed to your balance sheet which shows your financial condition at a point in time.

3. The Cash Flow Statement

A cash flow statement is the financial document that presents income actually received and expenses actually paid. This statement (usually modified for a small business) generally shows beginning cash balances, cash inflows, cash outflows and ending cash balances. In its simplest form, a cash flow statement is presented in the following format:

  • Beginning cash balance
  • Plus cash inflows
  • Minus cash outflows
  • Equals ending cash balance.

Sample cash flow statement for a new business (beginning cash balance is $0):

cashflowstatement
There are many free resources available to help you prepare your financial statements and understand the basics of business accounting. For a deeper dive into this topic, SBA offers a free online course: Introduction to Accounting through its Small Business Learning Center. The course also includes automated financial statement templates.

You can also discuss your financial statements and any accounting questions you have with a business mentor (such as those available through SCORE) or get assistance from your local Small Business Development Center.

U.S. Small Business Administration
The SBA is an independent federal agency that works to assist and protect the interests of American small businesses. The agency delivers the answers, support and resources small businesses need to start-up, grow and succeed through district offices throughout the U.S. and a network of resource partners including SCORE.
www.sba.gov | Facebook | @SBAgov | More from the SBA

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Discussion (8) Comment


  1. SineliaVisitor

    This year is my second year in business and i have been keeping my record on notebook it get to a point now I need a software whose easy enough for me to use.can you suggest something? I am a caregiver i deal with elderly and services all software are for retail store!


    • SBAVisitor

      Small businesses should buy a widely-used accounting software for several reasons. If you have to hire a new bookkeeper, it will be easier to find someone who knows the software. Second, your outside accounting/tax firm, if you have one, will likely be able to access your files with their version of the software for ease in preparing your taxes or reviewing your accounting records. Third, the widely-used software options on the market for small businesses are there partly because they are easier to learn for business owners who are not accountants. They are less robust and more intuitive than other software solutions, but sufficient for small business needs. An Internet search will show that two of the most popular options are QuickBooks and Sage 50 (formerly Sage Peachtree). Whether these or another small business option is best for your business is a good question for your accounting firm.


  2. dave zVisitor

    I believe finding a recommended accounting software or two would be a great add for this type of article. We need to make small business life as easy as possible!!


    • SineliaVisitor

      I agree! as for me my business is a service provider which software should i buy?


    • SBAVisitor

      Although SBA doesn’t endorse one particular brand of software, our reply to Sinelia may be insightful for you as well.

  3. Wow.. this is kinda confusing. I was wondering if I myself has no knowledge with this can learn it? Or it should be better if I should hire an accountant or what?

    I own a small business or soon to be, it will be passed down on me and I have no idea how. But thanks for this great tips!

    • @Jerry, for a start I suggest that you hire an accountant. It is important though for you to take your time to understand the “Accounting Language” as some accountants are not ethical in their dealings and may therefore prepare “cooked” financial statements and make you believe that your company is doing well whilst they are busy taking away your money through fraudulent means. Accounting is no “train smash” for anyone who is willing to learn. Accounting follows a set of rules called Accounting Procedures and when once you master the rules you can never go wrong.


    • SBAVisitor

      Hi Jerry. Hiring a professional accountant, or getting insight from one, can be tremendously helpful. SBA doesn’t endorse one particular brand of software, but our reply to Sinelia may be insightful for you as well. Popular software options on the market for small businesses are often easier to learn for entrepreneurs who aren’t also accountants. Good luck!

 

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