Finances are the making or breaking of any small business. And while it’s tempting to rely on an accountant to get them in order, it pays to keep track of your own costs and earnings, as well as their relationship with each other.
Here are the three accounting spreadsheets you’ll need to become financially savvy.
Profit and loss statement
It’s one of the most important spreadsheets at a small business owner’s disposal, and for good reason. The profit and loss statement, or P&L, provides an at-a-glance summary of a company’s income and outgoings over a specific accounting period – usually by quarter.
The sheet starts by detailing earnings, from which the costs (shown immediately below) are deducted. The outgoings are displayed by type, from operating expenses to the cost of goods sold. Once these are subtracted you’ll be left with the bottom line – also known as net income or, more obviously, profit.
Cash flow statement
Various transactions, like loan repayments, tax paid and interest paid, won’t be documented documented on the P&L; instead, they’ll appear on the cash flow statement. In essence, this spreadsheet shows the amount of cash that’s incoming and outgoing, which allows owners and shareholders to see exactly where money comes from and how the business spends it. In addition, this statement can offer deeper analysis into how cash is moving around the business, and even offer the potential for a cash flow forecast.
It’s worth noting that cash at hand – detailed at the bottom of the cash flow statement – isn’t the same as net income. Why? Because the cash flow sheet doesn’t take into account future incomings and outgoings recorded on credit.
Balance sheet
Complementing the P&L and cash flow statements is the balance sheet, which is where your company’s assets and liabilities are listed, right from the time it launched. Keep it updated and you’ll be able to assess your business’s health – and have some idea of its future – at a glance with some quick balance sheet analysis.
The assets and liabilities should balance, hence the name. A business must pay for its assets, after all, usually via a loan – one of the most common liabilities – or by acquiring capital from shareholders. A company’s retained earnings (the income that’s reinvested into the business after dividends are paid) are detailed in the shareholders’ equity section of the balance sheets.
Having an understanding of the basics of your company’s finances is a great way to keep on top of business performance, and will help you plan for the future. But keeping on top of financial admin has benefits beyond the bottom line. Find out more here.
