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7 Financial Facts To Know About Your Business
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Article 1: Financial Statements
Any discussion of your business finances must begin with a discussion of financial statements. “Every business owner should have at least a basic understanding of business financial statements,” says Lisa Aldisert (www.lisaaldisert.com), a management consultant who specializes in small business financial management and growth.
Financial statements typically consist of three main components:
If you file a corporate tax return, or if you plan to apply for any type of financing, you must create financial statements. If you’re a sole proprietor filing a Schedule C, financial statements aren’t required, but they can be an invaluable financial management tool.
Balance sheet — A balance sheet is simply a snapshot of your business’ financial position at any given time. It reflects what your company owns (assets) versus what you owe (liabilities). Current assets are the resources that can be most quickly converted into cash (cash reserves, accounts receivable, inventory). Current liabilities are the short-term expenses necessary to finance the operation of your business (accounts payable, payroll, taxes).
Income statement — The income statement tells you how much money you made (or lost) during a given period of time — usually a month, quarter or year. It subtracts all expenses and taxes from revenue to give you a bottom line, or net income.
Of course, making a profit is your ultimate goal, but a close analysis of your income statement can reveal more than just a profit or loss. “A quarter-to-quarter or year-to-year comparison of the numbers tells more than just looking at the numbers in isolation,” says Aldisert.
At the end of the period being measured, net income is added to retained earnings not paid out in distributions (from the balance sheet). “The higher the level of income, the more is added to retained earnings,” says Aldisert, “which increases the overall value of the company.” Of course, many small-business owners take excess earnings and reinvest them in the company to purchase equipment, add staff or invest in other areas that support future growth.
Cash flow statement — The cash flow statement ties the balance sheet and income statement together by reconciling the changes in balance sheet positions from the beginning to the end of the period being measured (usually a year).
The cash flow statement reveals your business’ critical cash flow cycle — the cycle of cash conversion from inventory to sales to receivables and back to cash again.
“By monitoring the cash flow cycle,” says Aldisert, “a business owner can benchmark everything from a slowdown in collection of receivables to an increase in inventory turnover.”
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7 Financial Facts To Know About Your Business
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