Not every small business owner has financial expertise. If you struggle with spreadsheets, you can use software like QuickBooks or hire an accountant. Whether you manage accounting yourself or delegate it, understanding financial statements is key to success.
What Are Financial Statements?
Financial statements enable you to monitor your business’s finances and gauge its overall health. They are often necessary for lenders and investors before extending loans or investments. These statements are also valuable for managing your business and planning for the future, even without external funding.
The key financial statements are:
Balance Sheet: Reflects your business’s assets and liabilities at a specific point in time, such as at the end of a month or year.
- Current assets: Include cash, accounts receivable, and inventory.
- Long-term assets: Consist of savings or investments meant for long-term use.
- Fixed assets: Include equipment, buildings, and vehicles.
The balance sheet also includes:
- Current liabilities: Debts due within 12 months, such as accounts payable and loan repayments.
- Long-term liabilities: Debts due beyond one year.
Subtracting total liabilities from total assets yields your owner’s equity or net worth.
Income Statement: Also known as a profit and loss statement (P&L), this report details your business’s income and expenses over a set period, such as a month or year.
- Revenues: The total amount your business earned during the period.
- Expenses: The total amount spent to operate the business.
Subtracting expenses from revenues gives you your net operating income, which helps you identify trends in costs and revenues to maintain profitability.
How to reconcile your financial Statement?
- Compare Transactions: Align the transactions on your bank statement with your financial statements (e.g., general ledger or accounting software). Ensure that each deposit and withdrawal is accurately recorded.
- Identify Outstanding Items: Recognize any outstanding checks (not yet cleared) and deposits in transit (not yet processed by the bank). These items should be noted in your records even though they may not appear on the bank statement.
- Check for Errors: Look for inconsistencies or errors in the bank statement, such as incorrect amounts or unfamiliar transactions. Investigate any discrepancies to identify their cause.
- Adjust for Timing Differences: Account for timing differences, such as uncleared checks or unprocessed deposits. Adjust your financial records as needed to accommodate these variances.
- Calculate Adjusted Balances: Determine the adjusted bank balance by accounting for outstanding checks and deposits in transit. Compare this with the adjusted book balance to ensure they match, and address any discrepancies accordingly.
~Reconciliation of your financial statement involves ensuring your financial records are consistent with your bank account and other supporting documents. This process helps maintain accurate records and identify discrepancies~
Here is a sample template for tracking your financial statements. It includes sections for the income statement, balance sheet:
If you need a free template, email us, and we’ll send it to you. This template will help you organize your finances and keep track of your business’s financial health. Let us know if you want one!