So what do financial statements do? To put it simply, they show you the money. They show you where your company’s money came from, where it went, and where it is now. Many business owners don’t know how to read their statement, but here is the good news – if you can follow a recipe, you can learn basic accounting.
There are three main financial statements you should always have on hand:
- Balance Sheet: What a company owns, what it owes, and what is left over.
- Income Statement (P&L): An organization’s sales and expenses plus its proﬁt (or loss).
- Cash Flow Statement: The sources, uses, and balance of cash, shown on a monthly basis.
Although this section of offers information on each financial statement separately, keep in mind that they are all related. The changes in assets and liabilities that you see on the balance sheet are also reflected in the revenues and expenses that you see on the income statement, which result in the company’s gains or losses. Cash flows provide more information about cash assets listed on a balance sheet and are related, but not equivalent, to net income shown on the income statement. And so on. No one financial statement tells the complete story. But combined, they provide very powerful information on what parts of your company is working and which may need more attention.
Picking an Accounting Method
There are two basic methods of accounting: cash or accrual. The methods differ in the way income and expenses are recorded. The majority of businesses can choose the method that they prefer; however, there are some exceptions. For example, Corporations (other than S-Corporations) with annual gross income over $5 million are not allowed to use the cash method of accounting.
The Cash Method: When utilizing the cash method of accounting, businesses report the income when it is actually received and expenses when they are actually paid.
The Accrual Method: With this method, income and expenses are recorded as they occur, regardless of whether or not cash has actually changed hands. Here is an example: a sale on credit. The sale is entered into the books when the invoice is generated rather than when the cash is collected. Likewise, an expense occurs when materials are ordered or when a workday has been logged in by an employee, not when the check is actually written.
Setting Sales Goals
Setting sales goals is one of the most important effective tools in actually achieving them. When setting sales goals for yourself or your team, Put Your Sales Goals in Writing! Maintaining a written outline also helps to keep yours goals in sight, and allows you to physically track your progress by checking off each step and achievement.