Outside Consultant: Financial statements

  • Updated: March 30, 2014 - 11:13 AM

Kristian G. Mortenson

Question

I design, import and sell market baskets handwoven in Morocco. I think my business is doing well, but sometimes it’s hard to really know whether my business is healthy. I would love advice on how to create and share P&L statements and how to best assess the health of my business, including coming up with a valuation.

Laura J. Benson, Jeanne Beatrice, http://jeannebeatrice.com

 

Answer

Insights gained by organizing your revenues and expenses, assets and liabilities will allow you to make business decisions that are more likely to sustain and grow a healthy business. There are two primary financial statements that can benefit small business owners: the balance sheet and the income statement (also known as the P&L, profit-and-loss statement).

The balance sheet lists all of your business assets and liabilities at a given point in time. Assets include items such as inventory you’ve purchased, operating funds in your bank and other real property you may own. Liabilities would include money you owe your suppliers and any loans you’ve taken out on behalf of your business. The difference between your assets and liabilities is called your owner’s equity and is one measure of your business’ health.

The income statement begins by listing your sales (revenue) followed by the costs and expenses incurred during a period of time such as a month, quarter or year. The difference between your revenues and expenses in a period is your profit (or loss). In general, the healthier your business, the larger and more sustainable your profit. However, it is not uncommon for a new business to operate at a loss during the first few years.

In addition, businesses can benefit from budgeting their cash in- and outflows over a period of time. Budgeting your cash flows can help you identify when you might need to arrange additional funding or will have excess cash you can use to pay back an earlier loan.

Check out the Small Business Administration’s website (www.sba.gov) and the Minnesota Society of CPAs site (www.mncpa.org).

About the author: Kristian G. Mortenson, assistant professor of accounting, University of St. Thomas Opus College of Business.

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