When you run your own small business, it can be difficult to keep an objective distance from what you do.
Bills come in, sales go out, you have your day-to-day goals and you watch the curvy line of profit and loss make its inexorable progress throughout the financial year. You have your big one-year and five-year plans, and it takes a serious upheaval for you to reconsider them.
Even if things take a surprising turn – a rough patch or an unexpected boom period – it is human nature to swallow these changes and rationalize the impossibility of them changing the business plan on which you worked so hard. Maybe you assure yourself that things will work out anyway, or that this is no time to take a risk by deviating from your roadmap.
If you alone are responsible for this business plan and for keeping your company afloat, there might not be anyone else around to challenge your views. This is just one reason why maintaining your company’s financial statement is wise business practice. It also means you have a document ready to present to potential investors or collaborators, and that you’ll only need to give it a tune up when the time comes to approach your bank for a loan to take your business to the next level.
But while it’s always pleasant to look at a sheet of healthy, blossoming figures, even when business is booming the actual process of putting your financial statement together can be intimidating. If you started your company because there was a service you were keen to provide, or an idea for a product you were excited to build and sell, then sitting in front of Excel trying to make the numbers add up probably seems difficult – and definitely not a lot of fun.
When you break the document down into its three component parts, however, it starts to seem more straightforward. And once you’ve created your first one, you’ve done most of the hard work – and all that remains is to update it every quarter, or when you are faced with an investment opportunity.
So what are those three components all about?
The first section is your balance sheet, which gives a birds-eye view of your company’s position. The left hand side of this sheet should show your assets – the cash value of the stock and property owned by the company. This is broken down into ‘current’ assets, meaning those that are likely to be converted to cash within the next twelve months, and ‘non-current’ assets, indicating those you’ll hang on to for longer, such as office furniture or vehicles. The right hand side of the balance sheet is your liabilities – the debts you need to pay. Again these are divided into current liabilities (such as a small loan that you will repay within a year) and non-current ones (your mortgage, for example.)
The balance of this section (your assets minus your liabilities) is represented as the ‘shareholder’s equity’ – what you would be left with if you sold off your assets and settled your debts right now.
The remaining two sections provide different ways to look at the current profitability of your business. Section two, your Income Statement, pits your revenues and gains (including sales, service charges, and any interest you might be earning on your business account) against all expenses and losses (equipment, salaries, rent etc.) for a given period, most commonly the past quarter. This gives an indication of the general health and profitability of your business as it stands.
The final section, your cash-flow statement, is a more specific version of the same thing. Here, your profits and losses should only refer to the cash that’s come in or gone out over the same period. It is a more tangible picture of the current state of your business, not taking into account non-cash elements such as depreciation.
To give you a clearer look of just how it functions, you may be interested to take a look at this handy new visual guide – a kind of dissection of the business financial statement. Get your first statement out of the way, and you’ll find you have a much clearer perspective on the current health of your business – and what you need to do to make the next great leap.
G. John Cole is a digital nomad and freelance writer. Specialising in leadership, digital media and personal growth, his passions include world cinema and biscuits. A native Englishman, he is always on the move, but can most commonly be spotted in Norway, the UK and the Balkans.