You’ve launched your business and are all set for exciting things like making big sales, scaling 5x, or hiring a superb team. But every fun task is accompanied by less exciting processes that you may or may not like doing, such as financial accounting.
Creating financial statements, managing spreadsheets, and updating budgets might not rank on your priority list, but having accurate, up-to-date financial statements is vital to achieve a clear picture of your startup’s financial health and planning its growth.
As a founder it’s okay if you don’t have a finance background and haven’t fully pored over your finances. Here are some financial statement essentials worth knowing, even if you have an accounting or finance team.
The balance sheet of an organization reflects its assets and liabilities along with shareholder equity. You should ideally start maintaining this from the day you started your business, listing all your assets, any investment that is owed to lenders/creditors, and the investment with which you created the business.
a. Assets should include all your fixed assets as well such as equipment, stock inventory, and any other financial assets owned
b. Liabilities should include all the accounts payable, money owed to creditors or banks, and credit card balances
c. Equity is equal to liabilities subtracted from company assets and reflects the book value of the shareholders’ ownership in the company
An income sheet of a company reflects its revenues and expenses along with the resulting income or loss. It is often referred to as P&L or profit-and-loss statement.
a. Income includes any kind of earnings such as retail or wholesale sale, income earned from rent, services, and so on
b. Expenses include anything the business spends money on such as stock, salaries, marketing, utilities, rent paid for a property, and so on
c. Net profit or loss Is arrived at by subtracting expenses from revenue. The net result is presented in a dedicated section at the bottom of the statement.
While a seemingly simple one, the income statement is valuable for you to judge your startup’s performance and examine its financial health; and that makes it one of the first statements a lender or an investor would want you to share. This statement will help you assess where you need to save or spend more to grow your business revenue and your margins.
The cash-flow statement of a company reflects the inflow and outflow of cash along with showing the cash balance. It includes three main sections:
a. Cash flow from operating activities is cash generated in a startup such as sales receipts, tax payments, salaries paid, and other operating expenses
b. Cash flow from investing activities includes any source or use of the startup’s cash for an investment such as buying or selling of an asset, any merger, and acquisition-related payment, and so on
c. Cash flow from financing activities includes any cash from investors or cash given to shareholders such as capital received, or dividends paid
The cash flow statement is a critical element in a full set of financial statements, but businesses tend not review it on a regular basis. Your CFO and accountant will, however, pay close attention to the cashflow detail as part of managing your business’ stability and viability.
Sum it up
Regularly tracking and maintaining your startup’s financial statements will put you in the best position possible to take advantage of growth opportunities and to plan your budgets and cashflow.