Whether you do your own accounting and bookkeeping or hire a professional to do it for you, you need a reliable method for keeping track of how much money comes into and goes out of your business. Whatever method you use, you want to have at-a-glance records to use as a tool to help you manage the financial health of your business.
Benefits of Creating Financial Records
In addition to helping you understand and manage your money, your financial records can help you secure loans, attract investment partners and communicate essential financial information to your business partners. The three most common types of financial statements are cash flow statements, income statements and balance sheets.
Cash Flow Statements
Cash flow statements show how much cash your business has on hand. Small businesses can benefit from predicting their cash flow as well as just documenting it. A cash-flow projection is like a month-by-month budget that enables you to look ahead and plan for anticipated income and expenses. For instance, doing work for which you send a claim to an insurance company does not generate immediate income, but you can project when you will receive that payment. Likewise, charging a piece of equipment to your company credit card does not take money out of your checking account immediately (unless you use a debit card), but you know when to anticipate having to pay the expense. These types of anticipated income and expense are called accruals.
Income statements show your businesss revenues, expenses and income, resulting in a profit or a loss. Income statements are particularly important if you need to borrow money because they tell lenders whether your business is making money or not. They also come in handy when you're calculating your quarterly estimated taxes and preparing your Schedule C for your federal income tax return. An income statement shows the following categories of financial information:
Revenues: Examples include income received from massages, product sales, as well as from associates who share space with your practice (share in lease expenses).
Expenses: Examples include fees paid to a bookkeeper, rent, purchase of supplies, utilities, memberships and training.
Net Profit (or Loss) after Tax: Total revenues minus total expenses equals your profit or loss.
Balance sheets show your businesss assets, liabilities and equity. A balance sheet includes capital assets, such as equipment you own and security deposits that will be refunded to you later. You should update your balance sheet quarterly or annually. The balance sheet includes three categories of information:
Your business assets: Examples include cash, furniture, equipment, supplies—essentially, everything you need to operate your business.
Your business liabilities: Examples include loan payments, utility bills, your office lease—essentially, everything your business owes.
Your business equity: Equity is the value that remains after you subtract the total liabilities from the total assets. The concept of equity reflects an accumulation of the owner's investments, withdrawals, and the accumulated earnings of the business.
Do It Yourself or Hire?
Many rules govern the preparation of balance sheets and other financial statements, including such things as the calculation of depreciation. It is up to you to decide whether you want to learn these rules or to hire an accountant.
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