Sometimes when it comes to business accounting, it’s good to start with the basics. Let’s review three business financial reports every business owner should know and understand as part of the essentials.
Before we jump into the first of three business financial reports every business owner should know and understand, we need to share the basic accounting formula.
Simply put, the accounting formula is Assets = Liabilities + Equity. To further clarify, we’ll briefly share what each element is.
First, assets refer to items such as bank accounts, fixed assets and accounts receivable. Secondly, liabilities include things like credit cards, long-term notes and accounts payable.
Lastly, equity is capital contributions, dividends and distributions. With these basics explained, we can move onto the first of the essential financial reports.
The balance sheet is a report that summarizes all of a company’s assets, liabilities and equity in two columns. The first column reflects assets with the second column showing liabilities and equity.
Generally, the balance sheet is created around the end of a specific time frame. For example, they are often produced quarterly or annually.
Ideally. total liabilities and equity should equal assets. Hence, the two columns represented on a balance sheet should match.
Next up, income statements. An income statement basically reflects the business’s income and expenses. The three main elements on this report are revenue, expenses and profit.
The income statement can be referred to as a profit and loss statement as well. Like the balance sheet, it is produced at a specific time such as monthly, quarterly or annually.
Projected Cash Flow Statement
Finally, the third must-have financial business report is the projected cash flow statement. Typically, this report illustrates a list of expected cash flow—both inflows and outflows.
Once again, it also involves a specified period of time. Usually, projected cash flow statements tend to reflect a 12-month period. Items included in the projected report are your opening balance, sales, expenses, uses of cash and a closing balance.
Now that we’ve covered the basics of three business financial reports every business owner should know and understand, are you left with more questions? That’s what we are here for! Schedule your free consultation today to discuss in greater detail these essential business reports and much more. For more industry news and guidance, keep reading our blogs.