And how can they help a small business owner survive the crisis?
You have quit the 9-5 because you have a passion to share your gift with the world. You have created your small business with your own hands, and you are still balancing work with the kids and everything else that goes with it. Life is difficult, but everything is fine as long as everything is fine. Then enters a crisis.
What are you going to do when it is date night and the one machine that creates all your product, and thus your income, breaks down on a weekend? You have a work crisis that is quickly going to turn into a financial crisis. This is the entrepreneur’s daily crisis, and there are 4 primary financial reports that you should learn to lead and guide your decisions.
What are the financial statements?
The four primary financial statements create a full image of the money that supports and runs your small business. They are the financial profile of how much money you have, have had, and have the potential to soon make. A few moments with these 4 statements and an entrepreneur can decide the exact month that his or her business will run out of cash or become the next million-dollar idea. The statements are as prophetic as they are historic. This month I want you to become introduced to your own set of financial advisors, the financial statements:
- The Balance Sheet (The sum of your financial activity to date)
- The Profit & Loss Statement (how much money you have made and spent)
- The Cash Flow Statement (how much liquid cash is available after all transactions)
- The Budget Statement (where and how you will spend your next month’s income)
Why are the financial statements important?
When combined, the financial statements will help the entrepreneur to make the best financial decision possible. In the case of our crisis, we need to spend a large amount of cash to repair our machine. We also need to know if we can still make date night or if we need to stay home and be the repairman due to cost. This is when the financial statements become the most important financial advisors in our tool chest. Let’s take a closer look at how they can help, and then we will break down each statement in a series of blogs over the month.
The 4 primary financial statements
[The Balance Sheet]
The balance sheet is a simple math formula organized into an easy to read, descriptive table. It allows us to see the monetary value of what assets the company owns and what the company owes on those assets. Therefore, the formula is simple: assets = liabilities + equity. Imagine the balance sheet is like your Facebook profile. It is a quick read of your company’s life to this point.
[The Profit & Loss Statement]
The Profit Statement, as I like to call it, also states a historical fact in the form of a formula;
Gross Income – Expenses = Net Income.
If the balance sheet is like my Facebook profile, then the profit statement is the # of likes I get on a single image or a measure of how well your image did. This is how we determine what our company profits after subtracting business expenses. The net income can then be used to do so much: invest in the business and make more money, put into our personal account and spend on our children’s Christmas, give it away as a donation to our favorite charity. We will dive into the Profit Statement very soon, but for now we must remember that this statement tells a very special story of our company. Make this statement a monthly habit in your life.
[The Cash Flow Statement]
Cash flow seems way too obvious, however, a quick look at the Profit Statement shows us that it does not consider the actual cash that is in your bank account. How can this be? Simply put, the profit statement does not consider the cash payments made on the debt that you owe. Does your company have accounts receivable? This is income that your customers have promised but they have not yet given you. The cash flow statement takes these values into account, and then shows the business owner what they made in liquid cash for a given period.
[The Budget Statement]
If the Profit Statement mimics the like count on Facebook, then the budget statement is your marketing strategy. Question: would you put on image onto your Facebook feed that would cause you to lose friends? NO WAY! Your marketing strategy and analysis would keep you from posting an audience reducer. That is the special magic of the budget statement. It helps you get as close as possible to deciding where your money goes before you spend it. It can tell you how much to expect in: income, expenses, and net income. The effectiveness of this statement is in direct correlation to your discipline, and discipline in business could be your key to success.
These 4 statements will seriously up your business management game. They will become your guide, your financial advisors. Now back to our crisis. It is date night, and you have a decision to make. Can you purchase that printer part with cash and get your team up and running again? Let’s continue this conversation with a look at each of the statements in detail.
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