We have a firm ‘no question is a stupid question’ policy at Accountfully. We understand that our clients aren’t bookkeepers or accountants and appreciate that more often than not, they might not have the financial vocabulary to ask the ‘right’ questions—you don’t know what you don’t know. Our team of outsourced bookkeepers and accountants answer the questions of small business owners and entrepreneurs on a daily basis. We break down reports, translate data, and provide information that will be meaningful when it comes to make decisions. Today we’re going back to basics and giving business owners a little refresh when it comes to their financial statements.
Whether you’re a product-based business owner or a service-based business owner, understanding financial statements is a must. According to Investopedia, financial statements are “meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers.” When managed correctly, they can provide valuable insights into the business. At Accountfully, we place emphasis on many reports, including the balance sheet and cash flow statement. Together, they help us understand the financial health of our clients’ businesses.
A balance sheet gives you information about how much money you have and where that money is allocated at certain points in time. Depending on the kind of business you have, you may review your balance on a weekly, monthly, or quarterly basis. Regardless of how frequently you’re reviewing your balance sheet, you can expect it to be divided into three categories.
Assets: Your assets are how much money or items of value/positive inputs the business has in total. This includes things like cash, inventory, prepaid expenses, property, and equipment. (But remember, not all assets are tangible. You can consider things like trademarks and patents as assets too.)
Liabilities: Your liabilities are how much money the business owes. This includes things like accounts payable, loans, payroll and sales taxes due, and prepaid revenue.
Equity: Your equity is the net difference between assets and liabilities and helps calculate the net worth of your entity. This includes what the business has earned to date, taken out as distributions or dividends, and money contributed to the company as stock or membership units.
When looked at collectively, a balance sheet can give you a good sense about where the business stands as a whole at a point in time. That being said, it’s most valuable when reviewed by a team that can help you break it down in a way that makes sense to your business. The Accountfully works with clients across a variety of industries to do just that.
Cash Flow Statement
Like a balance sheet, cash flow statements are important for businesses of all sizes. It quite literally helps you understand the flow of cash in your business—who’d have thought? More seriously, it helps you understand the money coming in and the money coming out of your business. This is meaningful because it can help you plan for the future. Generally, you can expect your cash flow statement to broken into three sections:
Operations: Your operating expenses are the main type of cash inflow and outflow for a business. The cash comes in from customers and clients and goes out to pay for expenses. And if you’re a food entrepreneur, expenses include things like inventory.
Investment Activities: Your investment activities tend to be for long-term planning rather than the day-to-day operations of your business. They are typically from the purchase or the sale of fixed assets.
Financing Activities: Your financing activities are the cash that flows to and from third-party financials backers. It can include things that are related to equity and as shared purchases and dividends. This is important to consider because it helps you see how much cash your business is generating rather than from netting from third-parties.
Access to information is great if you’re a business owner, but even more valuable is an understanding. Be sure to work with an outsourced bookkeeping and accounting team that can help you make sense of financial statements like your balance sheet and your cash flow statement. Not only will this help you understand where your business is at and how it’s performing, it will also help you plan for the future. Not sure if your business has these financial statements available and up to date? Don’t hesitate to ask us. We’ll want to help you stay informed.
Accountfully is an outsourced bookkeeping and accounting firm headquartered in Charleston, SC. With an additional office in Nashville, TN, we serve modern brands and businesses across the country. From pre funded startups to multi-million dollar companies, our clients are visionaries across all industries.