Types of Business Financial Documents

A balance sheet shows a business's financial condition in a single point in time. It includes a list of assets, liabilities, and equity. Balance sheets have two sides, assets are listed on the left side and liabilities and equity are on the right. When completing a balance sheet total liabilities and equity should equal total assets. 

 

Here is an example: If a building is owned and is worth $100,000 that is an asset which appears on the left side of a balance sheet. However, lets say in order to purchase this building a loan was taken out for $80,000. This loan will show as a liability. Since the building is worth $100,000 that leaves $20,000 showing as equity. 

 

$100,000 Building Worth (Asset) = $80,000 Loan Amount (Liability) + $20,000 Already Paid Towards Loan (Equity) 

 

A balance sheet is important because it give a quick view of how your business is doing by showing what a business owns (assets) and what it owes (liabilities). 

Instead of looking at one point in time, like a balance sheet does, an income statement looks a business' financials over an extended period of time and may also be called a profit and loss statement because it shows whether a business made a profit or had a loss. 

 

For example, XYZ company sold 50,000 widgets at $20 a piece equaling $1,000,000 in net sales. The cost for materials to make each widget is $3, at $150,000 total. The $150,000 is part of what makes up Cost of Goods Sold (COGS) but labor and cost of machinery must also be taken into account along with any other expense related to manufacturing a product. COGS will not include items such as sales, marketing, insurance, utilities, rents, depreciation, etc. For this example, the extra costs have added another $200,000 bringing the COGS to $350,000. This means the Gross Profit is $650,000.

 

$650,000 (Gross Profit) = $1,000,000 (Net Sales) - $350,000 (COGS)

 

Operating Income
XYZ company has a gross profit of $650,000. To calculate Operating Income, the Operating Expenses is taken from the Gross Profits. Operating Expenses are the line items not included in the COGS: sales, marketing, insurance, utilities, rents, depreciation, etc. For this example, the Operating Expenses add up to $250,000. This will make the Operating Income $400,000.

 

$400,000 (Operating Income) = $650,000 (Gross Profit) - $250,000 (Operating Expenses)

 

Net Income
The final step is to calculate the Net Income. This is calculated by finding the sum of Operating Income and Non-Operating Income. The Operating Income for XYZ company is $400,000. The company also made $100,000 from selling scrap metal. This income does not count towards Net Sales, because it is not income from selling the widgets. This means the Net Income is $500,000.

 

$500,000 (Net Income) = $400,000 (Operating Income) + $100,00 (Non-Operating Income)

 

Operating income is added to the net non-operating revenues, gains, expenses and losses. This final figure gives the net income or net loss of the business for the reporting period.

A cash flow statement provides a summary of how cash is flowing in and out of a business within a set time period. To complete a cash flow statement, the balance sheet and income statement will need to be completed first. Information from the income statement and balance sheet are used to create the cash flow statement.

 

1. Operating Activities: Cash earned or spent in the course of regular business activity (ex: selling products or services)
2. Investing Activities: Cash earned or spent from investments the company makes (ex: purchasing equipment)
3. Financing Activities: Cash earned or spent in the course of financing the company with loans and/or lines of credit

Cash Flow Forecast
A cash flow forecast gives an estimate of the future financial position of a business based on expected income and expenses. If XYZ business has a beginning cash balance of $500,000 and expects income to be $600,000 and expenses to be $400,000, then the cash flow forecast would be $700,000.

 

$700,000 (Cash Flow Forecast) = $500,000 (Beginning Cash) + $600,000 (Projected Income) – $400,000 (Projected Expenses)

 

Why is it important?
A cash flow statement is important because it helps a business understand their current liquidity as well as estimate future cash flows. This helps a business make informed decisions about executing current plans and setting goals for the future.