You also need to be able to read your financial statements in order to be able to keep track, on an ongoing basis, what is happening financially with your company. It is likely that you will use some sort of spreadsheet program to keep track of your income and expenses. This allows you to give your accountant a comprehensive source of income and expenses. Your spreadsheet program may generate financial statements for you. Take a look at your software package and see if it does. The basic guide to financial statements in this article will assist you in learning to read and understand the financial statements that you will need to generate for your company monthly, quarterly, and yearly. You may want to use an Excel spreadsheet or you may opt for a comprehensive software program like QuickBooks
Learning the Basics
Many small businesses hire a financial professional to generate financial statements. Get up to speed on the financial statements that your financial professional generates for your company. These financial statements will help you determine your firm’s financial position at a given point in time, as well as over a period of time, and your cash position at any point in time. The output you receive from your accountant or another financial professional can help you operate your business more efficiently and make better decisions. For example, if your accountant tells you that you made a profit of $1,000 for the year, it helps to understand what went into making that $1,000 and how you can grow profits going forward. You may not have to know as much as the accountant, but it makes sense for you to understand the big picture.
The Income Statement
The income statement, also called the profit and loss statement, serves as the principal statement for measuring your firm’s profitability over a period of time. You’ll develop the income statement in a step-by-step process starting with the amount of revenue your company has earned. From sales revenue, you will subtract all your expenses in a format such as that illustrated in the following template. The larger and more complex your company grows, the more complicated your income statement will be. Your liabilities and equity equate to the funds used to purchase your assets. The balance sheet shows your firm’s financial position with regard to assets and liabilities/equity at a certain point in time, like a snapshot. Information for the Statement of Retained Earnings comes from the Income Statement and the dividend account. The Balance Sheet information is taken from the asset, liability and equity accounts in the general ledger as well as from the Statement of Retained Earnings. Finally, the Statement of Cash Flows is prepared using information from all the previous financial statements.
