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A balance sheet details the assets, liabilities and equity of your business at a specific point in time. An income statement shows what income comes in and what expenses goes out, detailing a net profit or loss for a business.
Balance sheet template
Income statement template
What is a balance sheet?
A review is a financial statement of what a company owns, what it owes and how much shareholders are investing.
The balance sheet formula is:
Equity + Liabilities = Assets
This is a general overview of your business finances on a specific date. In a very literal sense, it is meant to show if your business is balanced. That is, it checks that your equity and debts do not outweigh the value of your assets. Its purpose is to show which assets are liquid, which is important if:
- You must cover operational expenses
- There are unforeseen expenses
- The company is experiencing business changes that require additional money
You will be able to see if the debt is hurting your profits, which means you are working at a loss rather than a profit. While it’s important to look at your balance sheet for, say, a month or a quarter at a time, it’s important to compare it with other balance sheets. You can use other reviews of:
- Previous months or quarters
- The same months as in previous years
- Competitors and companies in the same sector
While the balance sheet is one of the few important financial statements, it is not the only one that analysts and accountants will look at. The financial performance of your business is also taken into account through the cash flow statement and the income statement.
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What is an income statement?
An income statement is also a snapshot of a company’s financial performance. But he details income and expenses, as well as the loss or net profit, during a given period. The income statement is calculated as follows:
Profit = Income – Expenses
Income statements are usually monthly, but may show quarterly or annual profits (or losses). This can be monthly, quarterly, yearly or monthly compared to previous years.
On an income statement, you will see:
- Income. These are things like sales, goods and services sold to make money. It may also include fees or rents collected, if applicable.
- Expenses. This is what you are spending money on. These can be operating expenses, debt, interest owed on top of that debt, and taxes.
- Net income (or loss): You will have net revenue by deducting your business expenses and operating expenses from total income. This includes the deduction of depreciation, interest and taxes. If the number is positive, you have made a profit. If it is negative, you have lost money and you may be operating at a loss.
Sometimes these line items are combined with sub-items to present a specific detail. For example, expenses can be broken down further to include operating expenses for things like equipment, marketing, and sales. And it can go even further, as if you wanted to include gross sales and net sales.
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How to use a balance sheet and income statement to get a clear financial picture of a business
When you apply for a business loan or an accountant checks the financial health of your business, they look at three distinct things:
- Balance sheet
- Income statement
- Statement of cash flows
All these will show how your business behaves in terms of profit and loss. They will also show how quickly you can handle a financial disaster with your cash flow.
Although not the same, the balance sheet and the income statement will be able to give you a clear picture of how to maximize your profits through:
- Liabilities. What liabilities are the source of the biggest unnecessary expenses? If you can reduce your debt or major expenses, you could increase your profits.
- Great performances. You will be able to see which assets generate the most income. This can cause you to devote more resources to the top performers and possibly eliminate those at the bottom of the list.
- Major financial decisions. With both returns, you will be able to see whether you need to cut your losses, increase your resources in high yielding assets, or a mixture of both. To increase cash flow, it might not always be one or the other.
If you are managed well, you will be able to get a clear and precise picture of the financial health of your business. You’ll see expenses and income broken down to see what works and what doesn’t. The lower your liabilities, the higher your profits. The higher your profits, the more financially successful you can be. Examining your balance sheet, income statement, and cash flow statement is important in keeping a close eye on the financial well-being of your business.
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Monitoring the financial success of your business
A company’s accomplishments almost always come down to the money it has made. Keeping track of the financial performance of your business is the biggest indicator of your business success.
If you are working at a loss your business may be in trouble, while if you have even a small profit it is a sign of financial success. Using a balance sheet and income statement to detail where your money is coming in and going out will be your guide to continuing what you are doing or looking for ways to improve yourself.
If you are unsure of the importance of these documents, think about them when you need to borrow money. When taking out a business loan, lenders review these statements to see the health of your business. It’s good that you know how it goes before a lender does, that way you won’t be caught off guard by the results.
Growing profits, building up assets, and being able to cover emergency or unforeseen costs are good financial goals for your business. Make sure you have a good team of accountants and financial analysts to lean on when trying to improve or capitalize on your bottom line. A smart team could make the difference in the success (or failure) of your business. Use them to understand your balance sheet, income statement, and other important financial documents so you know where your business is today and where it’s going.
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