Financial statements can be a daunting task for most folks. This overview will cover the three parts: income statement, balance sheet and cash flow statement as well as a couple of tips. Preferrably, use a spreadsheet program like Excel or Numbers for all of your work.
The Income Statement is a big list of all your income minus your expenses. Its a simple concept really, it gets complicated where you categorize items (and with the Tax Man).
Income = Money In (Sales/Revenues)
Your income can be categorized by product, service or just a lump sum. So if you were a restaurant it might look like:
- Food sales
- Beverage sales
- T-shirt, hat, apron sales
You could break it down further by breakfast, lunch, dinner. Don’t forget to subtotal your income.
Expenses = Money Out
Expenses start with Cost of Good Sold (COGS) meaning, any cost to produce the product you are selling should be attributed to COGS. Again, if you are a restaurant it will be ingredient costs, chef salary and your cost of those t-shirts.
Income – COGS = Gross Profit
The rest is overhead (and again taxes). Now, if you need to purchase major equipment like stove, oven, walk-in refrigerator, tables and chairs, hold these for later – these costs are assets expensed over time which we will deal with in the balance sheet section. We will come back to depreciation expense at that time.
- Automobile: fuel, service
- Office supplies
- Liability insurance
- Marketing & Advertising
- Phone, internet
- Charitable contributions
- Dues & Subscriptions
You get the idea…
Income – COGS – Expenses = Net Income (Profit, Revenue)
Break out major expense areas. Have separate lists for marketing expenses and start up expenses or other expansive areas and link it back to your main list.
Next up: Balance Sheet