There are a few core records that every business needs to have readily available. At the minimum is a Balance sheet, Statement of Cash Flows and a Profit & Loss Statement. These are a necessity whether for preparing taxes, offering an equity position or a myriad of other details. The bottom line is whatever your business does if the money isn’t tracked you are not going to be doing it for long.
As financial professionals, here at EGFS we have seen just how well (and not so well) founders are at creating and upkeeping them. If you’re lost on how to begin fear not, we have your back with a basics primer. This won’t answer every question but it will make bringing together the start a lot more streamlined.
Here’s some charts and bullets to check off and make it all easier (or just give us a call, we’re cool like that).
The balance sheet is often considered the heart of depicting a business’s health. It illustrates the company’s Assets, Liabilities and any Equity accounts.
To start the header should have “balance sheet” at the top, followed by your company name below and the respective date it covers below that.
It’s divided into a basic T formation. These are maintained on a monthly, quarterly and yearly basis.
Kickass Ideas Co.
|All Assets are tracked on the left, there are current and non-current assets and they are recorded in that order.
Assets are any owned resources
Current Assets are any assets that can be readily converted into cash within a year
Current assets are:
o Marketable Securities
o Accounts receivable
o Prepaid Expenses
This is followed by a subtotal of all current assets
· Non-current Assets are:
Followed by a subtotal of all non-current assets
Any of the above in non-current must be usable for more than one year and depict its current value minus any depreciation
The two subtotals of each category will then be combined into a declaration of Total Assets
|Liabilities and equity are shown on the right side
Liabilities are all debts and obligations
Current Liabilities are all liabilities due within a year:
o Accounts Payable
o Accrued Liabilities
o Notes payable
Followed by a subtotal of all current liabilities labeled Total Current Liabilities
Next is Fixed/Long Term liabilities, these are ongoing ones lasting longer than a year
o Bonds payable
o Pension Plan Obligations
Followed by a subtotal of all fixed/Long Term liabilities labeled Total Fixed/LT Liabilities
Equity is all investments by owners/shareholders as well as past earnings
o Common stock
o Treasury stock
o Retained Earning
Followed by a subtotal labeled Total owners’ equity
The three subtotals of each category will then be combined into a declaration of Total Liabilities and Equity
When all accounts are properly tracked, and entered the total assets of the left will “balance” or equal the sum of all liabilities plus all equity, represented by the total amount on the right.
Statement of Cash Flows
Cash flow statements illustrate the inflow and outflow as well as overall net change of cash over the tracking period.
To bring it together you calculate the net changes that occur in cash from operations, investments and any financing that takes place.
Part 1 Operations Breakdown
- Start with the cash balance of the prior year or the total of what is at hand now if this is your first-year operating. This is the total of all cash available, whether totally liquid such as in a savings or checking account or readily liquid such as CD’s, money markets, etc.
- Add in any Net Income, this is from your income statement.
Net Income = Total Revenues – Operating expenses, depreciation, amortization and taxes
- Add back in Depreciation and amortization, these decrease assets but didn’t move cash.
- Add in the difference between the increases in both Accounts Payable and Accounts Receivable.
It should look like this:
+ Net Income
+ Depreciation and Amortization
– Accounts Receivable increases
+ Accounts Payable Increases
Net Cash from Operations
Part 2 Investment/Financing
Here you want to adjust your cash based on any capital expenditures, financing, stock or dividend payouts.
Add the value of any:
- Short term debt
- Issued Stock
- Equipment purchases
- Redeemed Long Term Debt
- Dividend payments
All this adds up to your Net Adjustment to cash total.
Part 3 Sum it up
Your net increase or decrease to cash = Net Cash from Operations – Net Adjustment to cash total
Interpreting it all
When all is summed up there are two possibilities regarding your total cash holdings:
- A Net Increase in cash has occurred:
An increase can indicate that the company is running all its operating needs efficiently. Any management of resources is being maintained reasonably well and financing activities if any have been turned into growth or at least balanced.
Furthermore, increased cash indicates that there is room to take greater chances and reinvest.
- A Net Decrease in cash has occurred
If this is simultaneous to a bout of major investment in growth it is perfectly normal. If there isn’t some corollary that explains the decrease then overhauling operations and reviewing current financing is recommended.
Profit & Loss Statement
A Profit and Loss statement (P&L), or income statement is a straightforward listing of profits and loss contrasted. It illustrates a specified periods performance in how revenue is retained, how the top line is transformed into the bottom line.
The P&L is a summary of a period in contrast with the fine detail of a Balance sheet. It is similar in that way to the cash flow statement but differs by including data that doesn’t involve cash but does impact profit.
The basic steps involve totaling revenues and subtracting expenses. Some basics to follow are:
- Choose time frame (month, quarter, year)
- Specify Data accordingly, longer periods have less detail, shorter periods can be more granular.
- Use sales reports and other relevant raw data to document your numbers
- Sum up Income by category and overall total
- Gather all expense records
- Sum Expenses in both individual categories and overall total
- Include non-operating expenses (legal, accounting or bank fees)
A Profit and Loss statement is essential when dealing with either investors or creditors to offer simple insight into past performance periods.
We hope this has helped you get started and as always contact us if you would like to have greater insight into how your financial needs can be handled with ease and assurance.