These days, conveniently running a business is just within every business owner’s fingertips. A business owner can connect with bookkeeping and accounting firms online for financial management. And these agencies can offer complete solutions from keeping books up-to-date, business planning and forecasting, payroll, income taxes, sales taxes and more! But despite having this assistance, it still pays when business owners like you know bookkeeping and financial accounting—even just the basics.
In this blog post, we’ll help you understand what income statements, balance sheets, and cash flow statements are. It is important that you still know what these reports are for and the jargon that comes with them, even if you’re getting assistance from a bookkeeping and accounting firm.
An income statement, also called profit and loss statement, is just one of the many reports you’ll get to know your business performance. An income statement shows whether your business is profitable or not. Profitability is when your business has a higher income than all business costs. If you check your income statement, you’ll see a long list of details, which all contribute to knowing your business’s profit. The details are as follows:
Operating Revenues: A company’s earnings from selling goods and services.
Cost of Goods Sold/Cost of Sales: For manufacturers, this is the money used in creating products. For retailers and wholesalers, this is the cost incurred to acquire the products they sell from suppliers.
Gross Profit: You can calculate your gross profit by deducting COGS/COS from the price of your products or services.
Operating Expenses: These expenses include the money you use to pay office rent, payroll, employee benefits, and insurance. Marketing and advertising expenses are also included here. The total operating expenses are costs that must be paid to ensure smooth business operations.
Operating Earnings: You can get your operating income by subtracting operating expenses and depreciation from a company’s revenues.
Non-Operating Income: These items bring income to the company from sources other than sales. Non-operating items include dividend income, interest income, and money earned from selling assets.
Earnings Before Taxes: As the term suggests, this is your business's income before deducting taxes.
Net Income/Profit Margin: When all costs, total expenses incurred, and taxes are deducted from the company’s earnings, you’ll get your net income. This item defines whether your business is profitable or not.
Understanding an income statement is essential for all business owners. To make the most of the report, check your net income. Apply the 5%, 10%, and 20% rules to see whether your business is going well or needs a little push. A 5% profit margin is low, so you must set game plans to increase sales and lower expenses. A 10% profit margin is a good start if you have just begun your venture. Still, aim for the 20% and up margin—a percentage considered high or good.
To validate or negate your assumptions, you can check out the income statement’s notes added by your accountant. Accountants are trained to do financial analysis, so you’ll find their insights helpful. You can also get into the details and see which expenses are hurting your business, and check if there is a chance of lowering them.
Don’t forget to do a comparative income statement analysis from one particular period to the next. It is a usual practice to compare the latest and the previous year’s income statement. But for startup businesses, you can analyze income statements more often, so you can see how your profit is doing and if there are changes you need to make with your business plans to reach your profit mark.
To know your company's assets, liabilities, and shareholder’s/owner’s equity, the report you need to check is the balance sheet. These three details in the balance sheet reflect your company’s net worth and can also be used to know whether you can pay your financial obligations.
To understand this report better, let’s check what net worth, assets, liabilities, and shareholder’s/owner’s equity mean.
Net Worth: You can calculate your business net worth by deducting liabilities from assets. Net worth, also called net wealth, shows your company’s value.
Assets: Assets may be a single category in the balance sheet, but they can be further broken down into different details to pinpoint where your company's money is coming from. Some company assets are the following:
Not all these assets are in cash form, but they all add value to your company assets.
Liabilities: This is the money that you owe to people, organizations, or suppliers. Some examples of liabilities are the following:
These liabilities can be paid in the short-term or long-term, but they will cost you one way or another.
Shareholder’s Equity/Owner’s Equity: Shareholder’s equity is the difference you get when liabilities are deducted from the assets. It is the money you, shareholders, or stockholders will get from all liquidated assets minus liabilities. If you are the sole proprietor of your business, you’ll get the owner’s equity.
There are a lot of insights you can get by analyzing a balance sheet. To begin with, you’ll know your business’s financial performance in terms of the amount of money you’ve earned or your profit through the shareholder’s/owner’s equity. The shareholder’s/owner’s equity can be positive or negative.
Positive equity is when your assets are higher than your liabilities. This means that you can finance your business operations and pay off costs or debts. When your liabilities exceed your assets, this is negative equity. You can adjust your business plans accordingly when you see your business is failing and maintain the best practices when you get good results.
You can also use this report during an investor’s presentation. Through this report, the investors can see where your money for business operations comes from and on which liabilities they are being spent on. They’ll also get an idea of what they’ll get based on the past balance sheets you provide. A positive shareholder’s equity will entice them to invest.
As the name of this report suggests, a cash flow statement shows how money comes in and out of your company. This statement has three main parts that will allow you and investors to see the details of how you spend and earn money. Here they are.
Operating Activities: As the name of this section implies, this is the money that comes in from sales, services, and regular business operations. It also tracks the money that goes out through accounts payables, tax and interest payments, and employee salaries.
Financing Activities: If you want to see how your business money moves around you, your investors, and creditors, check the cash from financing activities. This part shows the money that comes in from investors and banks and the money that goes out to be paid to debts and loans, to shareholders’ dividends, or to stock buybacks.
Investing Activities: The money you earn and give out in investing is included in this section. Some investing activities are loan creation and collection, asset acquisition and selling, and purchase and selling of fixed assets.
A cash flow statement shows how your company earns and where the company’s earnings are spent. It also reflects that the company has enough cash to pay business expenses.
An excellent looking cash flow is when all expenses are paid, and there’s still money left. This is called positive cash flow, a situation where there is more incoming cash than outgoing. On the other hand, a negative cash flow is when more money goes out of your business than what’s coming in.
It is important to note that a negative or positive cash flow doesn’t always reflect your company’s profitability. There may be times when cash flow is negative because you’ve invested in scaling your business, so it doesn’t mean that your business isn’t profitable. In the same way, cash flow may be positive because of borrowed credit and not because the company is profitable.
Income statements, balance sheets, and cash flow statements are three of the most important financial statements you’ll need to get regularly. These reports will be your basis for business planning and decision-making. When looking for investors, these are the reports you can present to show your capability to run and make your business thrive.
And if you ever need additional cash, these documents must be shown to creditors. And as a part of your business owner's daily routine, you can check these financial statements daily to stay updated.
When you understand these reports and the details within, it is easy to connect with the bookkeeping and accounting firm you are partnered with. During the reporting period, you’ll understand your company's financial health.If you are still looking for a reliable firm to partner with, Unloop is here for you! We have qualified professionals who can handle bookkeeping for your business and generate these reports. Contact us now for a detailed discussion of our services.
Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.