First Step Marketing

Cash Flow Statement

Cash flow is the lifeblood of a business, since it symbolizes the steady movement of cash in and out of a company. With a cash flow statement, you’ll be able to keep tabs on when you expect to receive revenue, or money owed you by customers, and then manage this money so it is available when you need it to pay your bills. Getting the numbers down in writing will help you to figure which months you should stockpile extra cash, perhaps by postponing that renovation project you had planned, and which months you’ll have enough revenue flowing into your checking account to reschedule it. Or you can plan to hold a special sale for the months when you believe you’ll have more money going out than coming in; the discount you provide to your customers is worth it if your cash flow is positive instead of negative.

When working up the numbers for a cash flow statement, besides including standard expenses, like rent and utilities, you’ll also count as expenses depreciation, amortization, and other situations which are technically expenses but don’t directly involve cash that exits your business account. Although a cash flow statement could arguably be used to prove your business isn’t doing so hot—after all, if you didn’t include the depreciation on your computer and business vehicle in the projections, your cash flow would look wonderful—as is the case with accrual accounting vs. cash accounting systems, the diligent use of cash flow statements provides a much more accurate picture of the financial health of your business.

A cash flow statement should be prepared and analyzed once a month.

Balance Sheet

A balance sheet is a financial statement designed to indicate the net worth of your business. Information about sales projections, revenue, and expenses are not included.

Instead, a balance sheet lists any and all assets as well as liabilities. Assets are defined as both current— accounts receivable, inventory, and all office supplies, anything that can quickly be converted to cash—and fixed, which includes business real estate, office equipment (owned outright or leased), and fixtures. The values of both current and fixed assets are added together to provide a dollar amount of the total assets that are owned by the company.

Liabilities are listed as current—accounts payable, taxes that are due, and other loans or debts that will come due over the next year—and as long term, which includes all other debt like mortgages, multiyear vehicle leases, and agreements with other businesses or independent contractors with whom you have signed a contract for a term longer than one year.

A balance sheet is usually prepared on a quarterly basis for the first year you’re in business, and then once a year after that.

Income Statement

An income statement is a simple document that can be prepared in a single keystroke with one of the bookkeeping software programs that also prepares invoices, balances your checkbook, and prints out checks. An income statement, also known as a profit and loss statement, is a document where you add up all given revenue over a stated period of time, and then add up all your actual expenses, or those that require cash to flow out of your business. Subtract the total expenses from the total revenue, and you are left with either a profit or a loss . . . that is, before any business tax you must pay (remember that payroll taxes are included in your income statement as an operating expense). Once you subtract the business tax, you are left with a net profit, or a net loss.

An income statement should be prepared at least once a month to keep track of the health of your business.

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This entry was posted on Monday, November 10th, 2008 at 7:51 pm and is filed under Accounting, Balance Sheets, Payroll, Sales, Tax, financial. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.