Author: Jeri Ann

“So how do I know how much money I *really* made last month?”

As you read earlier, the Balance Sheet shows you what your business’s finances look like for a single day.  But what about how much your business earned in a particular period of time?

Enter the Income Statement.

The Income Statement (or Profit & Loss Statement, or P&L) provides an outline of what your business earned (Income), along with what your business spent (Costs and Expenses). 

INCOME is comprised of Operating Income (i.e., sales income) and sometimes Gains.  The second section is the DIRECT COSTS, which are costs that are a direct result of providing the sales and services.  INCOME minus DIRECT COSTS gives you the business GROSS PROFIT. 

Next you have the EXPENSES section.  This section is sometimes called Indirect Costs since these expenses are a result of normal business operations whether or not a sale is made.  

After subtracting the EXPENSES, you get the final result of the Income Statement:  NET PROFIT.  Technically, that figure can be positive or negative (at which point the proper term would be NET LOSS).

Unlike the Balance Sheet, the Income Statement shows activity over a period of time.  The two most common date ranges for Income Statements are one month and one year, but your accounting software can create an income statement for any period of time.

So now you can look at a snapshot of your business’s finances with the Balance Sheet, as well as how your business performed with the Income Statement. 

But what about which way the money is moving?  Stay tuned for the next segment which talks about the Statement of Cash Flows.

Any questions?  Need help with reading your own Income Statement?  Send me an email and we’ll work through it!

“I have no idea on how financially healthy my business is. Where do I start?”

You love running your business, but maybe your understanding of the finances is focused on checking the bank account to make sure there’s enough in there to pay the bills and that your customers have paid you. But cash in the bank is only one way to see how your business is doing. You need to know what your business has, what your business owes, how your business is performing and how the cash is flowing.

In this short blog series, I’ll explain three basic yet vital financial statements: the Balance Sheet, the Income Statement, and the Statement of Cash Flows.

The Balance Sheet

The balance sheet shows you what your business owns, how much your business owes to others, and how much of the business you can claim as an owner.

• The things your business owns are called ASSETS. Assets include the cash in the bank accounts, inventory for sale, major equipment and buildings bought for the business, plus intangibles like trademarks and internet domain names.
• The money your business owes to other entities is called LIABILITIES. Liabilities include business loans, credit card balances and expenses owed at a future date (like sales tax or income tax).
• EQUITY is the difference between ASSETS and LIABILITIES. This amount represents how much of the business can claim as owner.

Here is an example of a balance sheet:

My Company
Balance Sheet
As of 30 June 20XX
ASSETS				LIABILITIES
Cash in First American Bank	$10,000			Business credit card from Northern Bank		$15,000
Company car	$15,000			Loan from ABC Bank		$75,000
Office building	$100,000
Web domain	$5,000			TOTAL LIABILITIES		$90,000
				EQUITY
				Owner’s Contribution		$40,000
				TOTAL EQUITY		$40,000
TOTAL ASSETS	$130,000			TOTAL LIABILITIES & EQUITY		$130,000

Did you notice that Total Assets equals Total Liabilities & Equity? That’s where the “balance” comes in. Assets are brought into the business by either the owner (Equity) or loans (Liabilities).

Did you also notice that the balance sheet date has the phrase “As of” before it? That’s because the balance sheet only shows figures for a single date. You can see how the finances have changed over a period of time by comparing one or more balance sheets, but each one will only reflect the Assets, Liabilities and Equity for one day.

In a nutshell, the Balance Sheet shows you a quick snapshot of what you own and how you paid for it. It’s a crucial piece of assessing the business’s financial status, but only how the finances are for a fixed point in time. The next post in the series will highlight the Income Statement, which shows your business’s profit margin.

Any questions? Comment below or send me an email!