One Blog Post at a Time
How about I offer you a down and dirty – straight to the point – boiled down version of the seven things you need to know about financials to be the savvy business owner you aspire to be?
Because, let's be honest, most of us aren’t going to raise our hand and volunteer to sit through Accounting 101!
This marks the beginning of a seven-week blog series covering the six major categories found within financial statements. Each week we will go in-depth to clearly identify what you need to know quickly, easily and efficiently to produce the best reports possible.
By understanding the in’s and out’s of each category, you can totally up your accounting game! And doesn't everyone want to do that??
After the series you will:
Week 1: Short Introduction to the Dynamics of the Balance Sheet (BS) & Profit & Loss (P&L)
Balance Sheet Categories
Week 2: Assets
Week 3: Liabilities
Week 4: Owner’s Equity
Profit & Loss Categories
Week 5: Sales
Week 6: Cost of Goods Sold
Week 7: Expenses
Let’s get started on our Week 1 Introduction!
As you peruse financials, you will notice that the Balance Sheet comes first, followed by the P&L. In our ordered accounting world this is the natural progression. The Balance Sheet is at the beginning because it is the living, breathing heartbeat of your business. It was born on the day of inception and it will continue on, adding and subtracting, until your business ceases to exist. The BS is the proverbial road that goes on forever. The P&L, on the other hand, calculates annual income, provides valuable insights about running our business and then “closes out” at the end of every year.
Q: What is the purpose of a Balance Sheet?
A: The BS’s purpose is to calculate the equity of your business.
Basically, the BS holds your stuff. It holds the things of value, debts that are owed and ultimately, the worth built up within your business. We will discuss each of these in detail in the coming weeks.
The simplified BS equation is:
Q: What is the purpose of the P&L?
A: The purpose of the P&L is to calculate annual income.
The P&L is a partier! If your business is on a calendar year, your P&L has a big New Year’s Eve party – out with the old, in with the new!
The P&L knows a thing or two about letting go. It does it every year. It knows its purpose. So as the ball drops – all the income/loss from the prior year gets transferred over to the BS. (We will talk about this move during our Owner's Equity discussion.)
On January 1, the P&L is born anew and starts all over at zero! It’s a fresh start. We get to make more money and better decisions. As savvy entrepreneurs we strive to always do it better than before!
The simplified P&L equation is:
The P&L starts by calculating Gross Profit. GP is comprised of sales less cost of goods. Gross profit is a valuable number to know and understand if you are in the business of selling items or services that have a cost attached directly to them (i.e. inventory, direct labor.) This one item could be the VITAL key in increasing your net income by several percentages. Largely, I have found it is often overlooked because its importance isn't completely understood. But don't worry, we will cover the why's and how's of Gross Profit throughout the series!
Once Gross Profit is properly established, you are able to discern what funds are available for operating expenses, such as, advertising, rent, salaries, etc. After deducting operating expenses, we are left with our coveted Net Income or Loss. If you are wondering, “What expense should I categorize as cost of goods and what’s an operating expense?” I've got you covered! We will dive deep into those exact questions in the upcoming blogs!
As a quick review, this image is an illustration of the flow of financial statements!
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Hi! It's Bridgett here! Are you ready to take your business to a new level? Let's do it!
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