As you develop your business, the need for financial information and tracking will grow.
Where is your money coming from?
Where is your money going?
What areas are the most profitable, and what are losing the most money?
A sole proprietor or partnership needs to take this into consideration in order to make sure they are being as effective as possible. Corporations and other businesses need to be aware of their situation at all times as well.
This is where accounting comes along. The basic financial statements that you should be aware of are:
- Balance Sheet - This Statement shows the breakdown of what your business owns (The Assets) and what it owes (The Liabilities) for a specific point in time.
- Income Statement – This Statement will show how your business performed over a period of time. Your revenues and expenses for the time are displayed here.
- Retained Earnings Statement – Your retained earnings statement will keep track of the amount of money you are distributing to the owners and how much of it is being kept for future growth.
- Statement of Cash Flows – This is a simple statement that will show where your company made money over a period of time, and how that money was used.
These statements form the backbone for a businesses financial accounting. Investors are going to want to see this before they buy stock. Bankers are going to want to see this before they issue any loans. And of course the owners are going to want to see this to make sure they are actually profitable.
If your company has intentions of going public, then it’s something that is going to be required by the SEC, the particular exchange, and demanded by investors and lenders.
Tomorrow I will begin to teach you how to create these documents.