Russell Colbourne - "Your Money Machine"
As a Business Owner You need to understand what happened from a financial perspective during your successful attempt to prove the business idea (Stage II). Now you have to take that information and build the foundation for growth, growth that maximizes all of the company's capacity.
What You Need to Know
As a business owner, the following 3 Statements are your friend because together provide the details of business performance:
You need to set up a regular reporting rhythm that becomes a habit every month.
Here is a snapshot of the importance of each financial reporting document;
The Balance Sheet is a picture of an event - the business's financial position at the end of each month. Its purpose is to provide a clear picture of your assets, liabilities, and equity. Assets are what you own that drives revenue or supports business operations. Liabilities are long-term or additional obligations you have to gain assets. Equity is the leftovers when taking on liabilities to acquire assets.
The Balance Sheet divides assets into groups: Current and Non-Current. Current Assets are usually under 12 months old and can be easily converted to cash. It includes cash and cash equivalents, accounts receivable, and inventory. Inventory is further subdivided in raw materials, work in process, and finished goods.
The Income Statement is a picture of the process - business conducted over the month. It is also known as the Profit and Loss Statement or P/L. It tells the business owner the level of profitability over the month. This is a critical document for bankers and other lenders to determine if the business is a good risk. It is a picture of Revenues & Gains, and Expenses & Losses. It explains how the Balance Statement changed from month to month.
Cash Flow Statement
The Cash Flow Statement explains the process - how the Income Statement (P/L) created the Balance Statement. It reorganizes the information from the Income Statement into: operations, investing, financing, and supporting. Operations addresses the sources of cash. Investing covers how acquiring assets were acquired to operate and grow the business. Financing is about shares and dividends; most small business owners are not taking or paying dividends during the company’s early stages so this is usually blank. However, pay close attention to this item because if you were attracted by the concept of an employee buyout, it starts here. Supporting covers non-financial transactions and taxes paid during the month.
What You Need to Do
These Financial Statements report the health of your business - useful for making decisions for smart growth. They also figure into marketing decisions, providing data showing which aspects of company operations provide the best return on your investment.
Here are the critical questions these answer as you make the transition from Stage II to Stage III. It is essential before finalizing your foundation for future growth:
Sales and Profit History
My top 10 Tips for achieving reliable month end reporting within 2-3 days of the month end.
Episode F3.003: The ABC of Rocket Ship Accounting
Written by: Russell Colbourne
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