All successful entrepreneurs know that all business success depends on having good control over your business’s finances. And to have that kind of control in your own business, you’ll need to have a proficiency in preparing the key financial documents that this article will show you.
Why Business Success Depends on Keeping Track of Money
Most first-time business owners try to run their businesses by ear. All the financial planning they do is limited to finding out where to get the money to pay next month’s bills and payroll.
This approach is dangerous for two reasons:
1.) It puts you at risk of entrepreneur’s burnout, and
2.) Your business won’t be able to expand.
In other words, you’ll be in danger of perpetually chasing after bills, until you get tired, give up, and slink back into the corporate world. Don’t chain yourself to that reality!
The solution: Build a sustainable business by regularly preparing the following financial documents.
Business Document #1: Ledger
Throughout the month, record every single transaction your business takes, no matter how big or small, in a ledger. The goal is to track the flow of money in and out of your business at all times. That way, at the end of the month, you’ll know precisely where your business’s money went.
Business Document #2: Income Statement
At the end of each month, collect the different revenue types and expenses types (“accounts”) into an income statement. There are many different “formats” you can follow to create an income statement, but the goal is to have a document that lists down every single account your business has, and the balance of each account.
Group all the revenue accounts into one section and add up the total revenue for the month. Then group all the expense accounts into the section below, and add up your business’s total expenses. Subtract the gross expenses from your gross revenue, and you’ll arrive at your business’s net income for the month.
Business Document #3: Balance Sheet
The balance sheet’s role is to find out what your business’s net worth is. This is especially important when you plan to go public one day, because your stockholders will want to know precisely where their money is going and what they’re getting back for it.
To prepare a balance sheet, group all your business accounts (derived from your income statement) into assets (cash, equipment, investments, accounts receivable, etc.) and liabilities (debts, accounts payable, etc.). The net worth of your business will be its total assets minus its total liabilities.
Business Document #4: Cash Flow Statement
Finally, use your income statement and balance sheet to derive a cash flow statement for your business at the end of every year. A cash flow statement basically shows the flow of cash in your business by comparing how much cash it had at the end of the previous year, compared to the end of the present year.
Basically, you group all cash flow into three categories:
- Cash flow from operations, where you list all the cash flow from operations, including net earnings, inventory procurement, etc.
- Cash flow from investing, where you list the cash flow from investments like equipment purchases and other assets.
- Cash flow from financing, where you list the cash flow from any debts, loans, and dividends.
The total over the one year period will reveal the cash flow within your business.
As early as now, you have to start practicing preparing these crucial documents. They may seem complicated and daunting at first, but as you get the hang of it, you’ll see they’re actually quite simple, and sometimes quite addicting, to prepare.
Most importantly, you’ll be armed with the necessary information that will help your business grow and evolve, and spare you the agony of entrepreneur’s burnout in the long run.
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Photo Credit: Getty Images