Financial statements are management tools
A financial statement is a written report on the financial condition of a company. Financial statements include:
A balance sheet helps you get a handle on the financial strength of your business. Usually posted at the end of a month or quarter, a balance sheet shows assets, liabilities, and owners’ or stockholders’ equity. Assets and liabilities are divided into short- and long-term categories. An asset is anything the business owns that has monetary value, including cash accounts like checking, money market, or government securities. Liabilities are the claims of creditors against the assets of the business. The difference between the assets and liabilities is the owner’s equity in the business. Balance Sheet PDF
Income Statement (also called a Profit-and-Loss Statement)
An income statement reveals what areas of a business are over- or under-budget and it helps track income tax liability. The income statement records all revenues and operating expenses monthly, quarterly or annually, effectively summarizing profit or loss during a given period. Income Statement PDF
Statement of Cash Flow
This statement is one of the most useful financial management tools you will have to run your business. The cash-flow statement measures financial activity over a period of time and tracks incoming and outgoing cash in a business. The cash flow statement reconciles the accrual accounting system to actual cash on hand at any given time period. Statement of Cash Flow PDF
Some small business owners prepare financial statements only at the end of the year when the IRS requires it. But if you generate monthly financial statements, you can use them to help run your business well and make the important financial decisions that affect the daily success of your business.
You may use either the cash or accrual method of accounting. Most businesses use the accrual method, which recognizes income when goods are shipped or services are rendered, and expenses when the business is obligated to pay them. The cash method, which recognizes income when money is received and expenses when they are paid, does not typically provide as accurate a picture of your business’ financial position.
Many small business owners use accounting software, like QuickBooks or Peachtree, to create their financial statements and others hire accounting firms. Some basic accounting templates can be found within Microsoft Excel software.
The SBA also has financial assistance forms, including templates for financial statements, available at http://www.sba.gov/tools/Forms/smallbusinessforms/fsforms/index.html.
Leasing vs. owning
When acquiring equipment, buildings or automobiles, a choice must often be made between buying or leasing. To help you decide, ask yourself these questions:
- How long do I plan to keep the asset?
- Is new or used equipment the best fit for my needs?
- How frequently does technology change with this asset?
- What are my financing options for purchasing vs. leasing?
- What are the tax benefits of buying vs. leasing?
The key to making a good decision is to understand your company’s needs and the purpose of the asset. Business owners who are weighing whether to lease or own can also consult with an accountant to more accurately ascertain the specific advantages for their unique situation.
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