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When you separate your personal funds from that of your business, it makes it much easier to understand where your money is going, and whether you are actually making a profit. Keeping track of your money is one of the most important parts of building a business, as budgeting is a priceless skill in all walks of life.
Keeping basic records helps you stay organized and reduces stress over time. This includes tracking income, expenses, and important receipts. Clear records also make it easier to prepare for taxes, apply for funding, or explain your finances if needed.
Using tools such as an income statement, a balance sheet and cash flow statements are extremely important to tracking a business's financial health. Scroll to learn more about each below.
Cash Flow Statement
Cash Flow Statement
A cash flow statement is a report describing a company's cash inflows (money coming in) and outflows (money going out) over a specific period. Unlike the income statement, it focuses only on actual cash, not future payments or accounting adjustments.
It is built on the equation:
Cash Inflows − Cash Outflows = Net Cash Flow
Income Statement
Income Statement
Income, or profit and loss statements, calculate net profit by subtracting expenses from revenue over a specific period. It shows if a business made a profit or (net income) or loss.
It is built on the equation: Revenue − Expenses = Net Profit (or Loss)
Balance Sheet
Balance Sheet
A balance sheet gives a snapshot of a business's financial position on a given date. It is built on the equation:
Assets = Liabilities + Equity
Assets are what the business owns (cash, equipment, inventory)
Liabilities are what the business owes (loans, unpaid bills)
Owner’s equity is what remains after debts are paid
When looking over businesses financials, consider 5 main variables:
Assets
Expenses
Liabilities
Income
Capital (Money put into company)
These will help you find almost all of the rest of the information needed to fill out important financial records, like the ones above.
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