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Accounting 101: How to Keep Financial Records

Posted by Internet Guru
November 4, 2009

Let’s take a look at the basic financial statements that every business owner should prepare and review on a regular basis: the profit-and-loss statement, the balance sheet and the cash flow statement. I asked Libby Ladu, founder of Right Brain Ventures and a financial advisor to entrepreneurs, to describe how each of these statements can help you understand your company’s overall performance and health.

Profit-and-loss statement.

This is a historical record (also known as an income statement) that shows how much you’ve made in revenues, how much you’ve spent and what your net income is over a specific period of time. The time period could be a week, a month, a quarter or a year, although monthly is the most common, Ladu says. The P&L tells you whether or not you’re making money, and how much you’re either making or losing. A further benefit: if structured properly, the P&L can show you which products or services are selling the best and where you are spending too much on expenses ranging from office personnel to advertising.

Balance sheet.

This is a snapshot of your company’s financial health, providing a summary of your company’s assets, liabilities and net worth. In other words, the balance sheet (sometimes called the statement of financial condition) tells you what you own and what you owe, Ladu says. Your assets will be the resources that your business controls: cash, equipment, buildings, furniture and money owed to you. Your liabilities

will be the debts or other obligations that you owe others, such as accounts payable, taxes, loans and payroll. Your net worth (also known as equity) is what’s left over— or assets minus liabilities.

Cash flow statement.

This captures how cash has flowed in and out of your company over a specific period of time. Think of it like the ledger of your personal checkbook, which shows money coming in, money going out and the remaining balance. “The cash flow statement is a very important financial statement because even though your P&L may be showing a profit, the business may not be generating cash,” Ladu says. “And the reverse is also true.” For instance, your sales may be growing as billings increase to new customers, but your new customers may be slow to pay, she says. At the same time, you might be spending more on inventory in anticipation of growth. The cash flow statement will show how all those changes affect your cash position.

Many business owners rely on financial software such as QuickBooks, MYOB, Peachtree or Microsoft Office to keep good records of all expenses and revenues. Other use more basic Excel spreadsheets. Before you invest, consult any number of online forums (www.cnet.com is one) to hear what other business owners like or dislike about the programs.

Write to Colleen DeBaise at colleen.debaise@wsj.com
source: online.wsj

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