In order to ensure that we are in the pink of health, an annual visit to the doctor for a thorough check up is a must. The same imperative routine goes for your business.
A regular check-up on the performance and status of your business is important. This way, you can gauge whether your business is doing well or not.
Financial check-up starts with a round up of your financial statements and a basic understanding of the three documents: the income statement, balance sheet, and cashflow statement.
The Income Statement. The income statement reports the performance of the business for a certain period of time (e.g. for the month, quarter, or year). It presents all the revenues earned minus the expenses incurred to determine the net income for the period.
To prepare your income statement from scratch, all you need to do is list down all your earnings and all your expenses. Get the total of both and get the difference. If you have your accounting records straight, then this shouldn’t be a problem. Otherwise, your accountant or bookkeeper can always do this for you. Still, you need to understand what it is and what you can use it for.
Obviously, positive figure on the income statement is desired; otherwise, you did not do good if it’s negative. Nevertheless, even if it is positive, you still need to look into your targets. Did the net income achieve your projected net income? If you were eyeing for 100,000, for example, yet you only ended with 70,000 net income, then perhaps there is a need to look at the variables affecting the figure.
Do a brief examination of your business habits
Did you buy your inventory beyond your budget? Were there expenses that could have been avoided? Is the pricing or mark-up margin appropriate?
Is the marketing strategy effective? Is there a need to change the way you market your product? Is there a need to add or lessen certain budget on certain expense item in your income statement?
The Balance Sheet. The balance sheet reports the status or condition of the business as of a certain period of time (e.g. as of December 31, 2015 or as of June 30, 2016). It presents all the business assets (you own), the liabilities (you owe), and the owner’s equity (you have after paying what you owe).
Examples of assets
Cash. This may include the bills and coins in your cash box, and the cash balance in your savings and/or checking account.
Accounts Receivable. This includes all sales of your products but which are not yet collected.
Equipment. The things you use in your store or office have values and these are part of your business assets. Your computer could fall under this category.
Examples of liabilities
Accounts Payable. Purchases that you have made but haven’t paid yet would fall under this item
Utilities Payable. This covers your water and electricity bills that are yet to be paid pending the due date.
To prepare the balance sheet, you just have to list down all that you own (assets) and all that you owe (liabilities), and the difference (assets minus liabilities) represents your equity in the business.
Looking at your balance sheet, you can see if out of all the assets that you have, how much is really yours. If the liability component is very huge compared to the equity, then maybe you need to review how you operate, and how you source out and use funds.
You can also compare the figures that you have today against the figures of previous periods. This way, you can check if the business is growing or declining.
The Cashflow Statement. This reports the inflow and outflow of cash in the business during a certain period. It presents how much money came in and how much money came out.
To prepare the cashflow statement, you simply write down all the cash receipts and all the cash disbursements. The difference of the two would be the cash balance, of which should tally with the cash balance reported in the balance sheet.
Example of cash receipts would be cash collections from sale of products and services. Example of cash disbursements would be cash payments for purchases, salaries, rent, and/or utilities. Cash payments for the purchase of additional equipment like computer would fall under cash disbursements too.
From this report, you would have a good glance of how you used your cash for the period. Did you use cash more than how much you supposed to do? Is there insufficiency of cash balance due to ineffective collection or too much expenditure? Is the cash balance today sufficient to finance the upcoming operational needs? Is there extra cash to finance the additional project you are planning?
Basic understanding on these three reports would be of great help as you review the performance and condition of your business. It gives you a good view of what happened in the past, where you are positioned now, and what does it indicate as you move forward for the next period.
Again, your accountant or bookkeeper could prepare the reports for you but you still have to make sense of them to make sound decisions for your business.
Do you need accounting help? Our friendly accountant would be glad to be of service. Call her now.