The Panhandle! With Crystal Boyles – Financial Statements Basics Made Easy!
Share on facebook
Share on linkedin
Share on twitter
Share on pinterest
Share on reddit
Share on email
Share on print
The panhandle! With Crystal boyles Financial Statement Basics
Hey there! It’s Crystal with The Panhandle. Running a business with financial intelligence can be simple, but it isn’t that simple! While everyone wants their cash balance to be positive, the balance in your account isn’t necessarily an indication that you are making money.Want to Listen to the Episode? Click here!
To really have a good idea of your business’ health, you need to keep up with and understand your company’s financial statements.
In the accounting world, there are three main financial statements. Today, we’re going to discuss the two statements used most often, Because one day, you will have an opportunity to expand your business– and your banker or investor will ask for your financial statements. Do not hand them your bank statement. Don’t you dare! You’re going to play it smart – you’re going to hand them an organized and accurate set of financial statements.
If you’re in business, you gotta make money! Employees at companies are counting on a paycheck, and you should expect your business to pay you. Besides allowing you to get a loan to expand your business, financial statements help you make important decisions that grow your business beyond your wildest dreams – or crash it right into the ground. Without knowing where you’ve been and how you’re doing, how can you make intelligent decisions about tomorrow?
Financial statements answer the questions that can make or break your business – like:
Should we open an additional day per week?
Are we able to hire an assistant?
Can we afford to sell this product at a discount?
Would we be more profitable if we opened a second location?
Acting blindly and answering these questions without first reviewing your financials and projecting out into the future is like playing the lottery. You may get lucky… but you probably won’t.
When you understand the basics after this episode – you’re going to feel more confident that you CAN do this and your business WILL flourish. And one day, you WILL get that loan or investor to take your business to the next level because of the successful financial footing you put your business on today.
The two most common financial statements are the balance sheet and the income statement. Both are important, but in different ways. Let’s start with the balance sheet.
The balance sheet is a snapshot at any point in time of assets (the things you own), liabilities (the things you owe to others) and equity (the amount of money your business either has left over or owes.) The Balance Sheet tells your business’ financial position over the course of the time you’ve been in business. Figures on this report are cumulative from day one. Just like your checkbook balance, each account goes up or down based on your financial activity from the day you open your business to the day you close or sell it.
Assets are things you own that have value. Examples include cash, inventory, an office building or a company van.
Liabilities are company debts, such as loans and taxes.
Equity includes what you originally invested to get the company started (like the initial bank deposit), prior year net incomes, current year net income and owner distributions (That’s when you pay yourself from the company leftovers and are not on a regular payroll).
As the name indicates, the balance sheet must balance. The formula is simple: assets = liabilities + owner’s equity.
Sample balance sheet:
The second important financial statement is called the income statement. The income statement, also known as the profit and loss statement, is an indication of your business performance. This statement tells you if you are making money. The income statement is reflective of a period of time: last year, the 3rd quarter, or this month for example. Your business operates on a 12-month period and every 13th month your Income Statement starts fresh. So if you started your financial records this September, they would turn over on Oct. 1st of next year.
The income statement reports net income. net income, the bottom line, is simply derived by this formula: revenue – expenses. If the number is negative, which happens more often than you’d think, it means you lost money during that time period. But look on the bright side! Without knowing you’re losing money, you don’t know there is a problem. Now that you know you’re losing money in this scenario you can drill down to the cause of your loss – and fix it!
There are two ways to make more money: increase revenues or decrease expenses. Having a timely and accurate Income Statement helps you re-chart the business back to health more quickly or improve an already well functioning business. Maybe you’re spending way more on advertising than you realized. Maybe revenue is unusually low and after a quick look you realize you forgot to bill your biggest customer last month. The income statement is like your assistant in improving and growing your business.
Sample income statement:
You can also use your income statement to calculate your profit rate. net profit is net income/total revenue. You can measure your business’ performance against other businesses in your industry by comparing profit rates. For example, with a quick google search, you can find that a cleaning business typically profits between 10%-28%. In the sample income statement, net profit is 7.8% ($33,386.96/$42,500). The business is a little below average and should look for ways to improve. Here are some other examples for profit margin by sector – that way you have a more accurate idea of what you should expect out of your business.
Profit matters. Your time matters and is worth something. That is why you need to value the profit rate in your business. Every minute spent in your business is time away from family or other commitments like church, volunteering or recreational time that also make a life worth living!
There are ways to keep financial statements either manually on paper or in a program like Excel, but be cautioned that takes away valuable time that you could be working in your business in a way that creates revenue. There are numerous software solutions out there that are very user friendly even for those with little to no financial experience. My favorite user-friendly version is Online Quickbooks, which can keep a simple business’ records for as little as $20/month.
There is much much more to financial statements, but this gets you acquainted with balance sheets and income statements. The local Small Business Administration office hosts several classes that elaborate on this, plus offer other great small business training. Check out their class offerings, both for in-person learning and online!
This is a lot of information to take in all at once – so if you need a break, take a pause and process what you heard. No rush! This will always be online. One teeeeensy tiny thing before you go though – net income does not equal Cash except in very few instances.
I’m an accountant by trade and I own a business with my engineer and lawyer husband. My husband has received this explanation from me about 100 times on the difference between balance sheets and income statements. Since we were both working with some basic financial knowledge, I presented him our financials. He saw net income. He was happy. He wanted to purchase a piece of equipment to make the job easier because we had the money. Out came my handy-dandy dry erase marker and we learned about a nifty financial statement called the statement of cash flows (that’s the third main financial statement I mentioned above). You see, net Income can seem to disappear before your eyes, but it leaves a trail if you know what you’re looking for. Refer back to those assets and loans on the sample balance sheet. Well, net income helped fund the down payment of the company van asset. net income also paid down principal of the company van loan. Then, the leftovers go to your bank account so you can save for future growth, save for taxes or take an owner distribution. My husband, not a huge fan of what he calls black magic, walked away thinking accounting is like voodoo. But, at least he has a wife that can tell him how much he can actually spend without breaking the bank!
The cost of doing business is much often more than we expect, but understanding your financials will give you some tools to analyze business opportunities and decisions so that you’re taking home more of your hard-earned money. And, when you have that meeting with the banker or investor, they will be impressed with how much you know about your business’ financial operations!
Good luck, and never regret hitting pause and asking questions when you feel stuck. Resources abound, and when there is a will, there is a way.
Crystal Boyles is the Owner of Adams Sanitation. She and her husband Nathan love to take RV trips with their two kids and dog, Teddy!
Great news, sports fans – Waste Pro has sued us again.. for the 4thtime, all because they want to hide how much MORE money they are making off you this year with their sweetheart, no-bid contract in Santa Rosa County
The PNJ is reporting that a 8-year legal drama about a permit to operate between the Santa Rosa County and a company that wanted to put a construction and demolition dump site has ended with the company winning a case in appeals court.