Bulletin #3003, Home-Based Business Fact Sheet: Keeping Your Business on Track, Part II

By James C. McConnon, Jr., Extension Business and Economics Specialist and Forest M. French, Extension Professor Emeritus.
Reviewed by Louis V. Bassano, Extension Educator.

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Financial Statements

What Are Financial Statements?

Financial statements usually include the balance sheet, income statement (sometimes called a profit or loss statement) and the cash flow statement. They are prepared from business records at the end of each accounting period, but they can also be done on a monthly or quarterly basis. Annual accounting periods usually represent a fiscal year or a tax year.

Financial statements may be either historical — that is, from records kept over time—or they may be pro forma, which include estimates of future income and expenditures, net worth or cash flow. Annual pro forma statements range from one to five years and are usually required by financial institutions as part of the operator’s business plan.

What will Annual Financial Statements Do for Me?

Balance sheets show you the financial position of your business in terms of assets, liabilities and net worth at a specific point in time. Let’s define these terms.

Assets are what the business owns. Examples of assets include current assets such as cash, inventory and accounts receivable, and fixed assets such as land, buildings and equipment.

Liabilities are what the business owes its creditors. They can be current liabilities, such as accounts payable and current portions of mortgage notes payable, or long-term debts such as notes or bank loans payable.

Net worth is what the business owes its owners. It is the difference between the total assets and total liabilities.

Balance sheets are usually prepared at the close of your business year. A sample format of a balance sheet is shown in Figur e 1. Remember, balance sheets should always be in balance — that is, total assets equal total liabilities plus net worth.

Income statements reflect the annual operation of your business in terms of total receipts and total expenditures. They show the net income or loss for the business. A sample format of an income statement is shown in Figure 2.

Cash flow statements represent the difference between your business income and disbursements. Cash flow statements summarize the cash inflows and outflows of the business. They show cumulative balances and help you identify accumulations of cash surpluses or deficits. This information can help you make good decisions about borrowing money or making short-term investments of the surplus funds. A sample format of a cash flow statement is shown in Figure 3.

Are There Other Uses of Financial Statements?

All three financial statements — the balance sheet, the income statement, and the cash flow statement — can be very useful in analyzing your business using ratio analysis. Selected information from the financial statements is put into a mathematical ratio form and then compared to an industry standard or previous historical information.

Figure 1

SAMPLE FORMAT
BALANCE SHEET
Your Company
December 31, 20XX

ASSETS

LIABILITIES AND NET WORTH

Current Assets:
Cash	$________
Accounts Receivable (net)	________
Merchandise Inventory	________
Supplies	________
Prepaid Expenses	________
Total Current Assets		$________
Fixed Assets:
Land	$________
Fixtures & Leasehold Improvements	________
Building	________
Equipment	________
Trucks	________
Less: Accumulated Depreciation	(________)
Total Net Fixed Assets		$________
TOTAL ASSETS		$________

Current Liabilities:
Accounts Payable	$________
Current Portion Long-Term Debt	________
Total Current Liabilities		$________
Long-Term Liabilities:
Notes Payable	$________
Bank Loan Payable	________
Other Loan Payable	________
Total Long-Term Liabilities		$________
Total Liabilities		$________
Net Worth:
Owner’s Funds	$________
Retained Earnings	________
Total Net Worth		$________
TOTAL LIABILITIES & NET WORTH		$________

Figure 2 SAMPLE FORMAT ANNUAL PRO FORMA OR HISTORICAL INCOME STATEMENT Your Company January 1, 20XX – December 31, 20XX
NET SALES	$____________
Less: COST OF GOODS SOLD	____________
GROSS MARGIN	$____________
OPERATING EXPENSE:
Salaries & Wages	$____________
Payroll Taxes & Benefits	____________
Rent	____________
Utilities	____________
Maintenance	____________
Office Supplies	____________
Postage	____________
Automobile & Truck	____________
Insurance	____________
Advertising	____________
Interest	____________
Legal & Professional Services	____________
Depreciation	____________
Other	____________
TOTAL OPERATING EXPENSES	$____________
PRE-TAX PROFIT (LOSS)	$____________
LESS: TAXES	____________
NET PROFIT (LOSS)	$____________

Figure 3

SAMPLE FORMAT
Monthly or Annual Pro Forma or Historical
CASH FLOW
Your Company

	Annual		Month _______		Month _______		Month _______
	Projected	Actual	Projected	Actual	Projected	Actual	Projected	Actual
CASH RECEIPTS
Cash Sales 1	_______	_______	_______	_______	_______	_______	_______	_______
Cash Sales 2	_______	_______	_______	_______	_______	_______	_______	_______
Cash Sales 3	_______	_______	_______	_______	_______	_______	_______	_______
Other Cash Receipts	_______	_______	_______	_______	_______	_______	_______	_______
TOTAL CASH RECEIPTS	_______	_______	_______	_______	_______	_______	_______	_______

CASH PAYMENT
Start-Up Expenses	_______	_______	_______	_______	_______	_______	_______	_______
Advertising	_______	_______	_______	_______	_______	_______	_______	_______
Material Purchases	_______	_______	_______	_______	_______	_______	_______	_______
Bank Service Charges	_______	_______	_______	_______	_______	_______	_______	_______
Car & Truck Expenses	_______	_______	_______	_______	_______	_______	_______	_______
Commissions	_______	_______	_______	_______	_______	_______	_______	_______
Dues & Publications	_______	_______	_______	_______	_______	_______	_______	_______
Employee Benefits	_______	_______	_______	_______	_______	_______	_______	_______
Freight	_______	_______	_______	_______	_______	_______	_______	_______
Insurance	_______	_______	_______	_______	_______	_______	_______	_______
Principal Payment	_______	_______	_______	_______	_______	_______	_______	_______
Interest Payment	_______	_______	_______	_______	_______	_______	_______	_______
Laundry & Cleaning	_______	_______	_______	_______	_______	_______	_______	_______
Legal & Professional Services	_______	_______	_______	_______	_______	_______	_______	_______
Office Expense	_______	_______	_______	_______	_______	_______	_______	_______
Rent on Business Property	_______	_______	_______	_______	_______	_______	_______	_______
Maintenance	_______	_______	_______	_______	_______	_______	_______	_______
Supplies	_______	_______	_______	_______	_______	_______	_______	_______
Travel	_______	_______	_______	_______	_______	_______	_______	_______
Meals and Entertainment	_______	_______	_______	_______	_______	_______	_______	_______
Utilities:
Water	_______	_______	_______	_______	_______	_______	_______	_______
Telephone	_______	_______	_______	_______	_______	_______	_______	_______
Power	_______	_______	_______	_______	_______	_______	_______	_______
Salaries and Wages	_______	_______	_______	_______	_______	_______	_______	_______
Other Payments	_______	_______	_______	_______	_______	_______	_______	_______
Draw	_______	_______	_______	_______	_______	_______	_______	_______
Taxes	_______	_______	_______	_______	_______	_______	_______	_______
TOTAL CASH PAYMENTS	_______	_______	_______	_______	_______	_______	_______	_______

SUMMARY
Starting Balance	_______	_______	_______	_______	_______	_______	_______	_______
Plus: Total Cash Receipts	_______	_______	_______	_______	_______	_______	_______	_______
Less: Total Cash Payments	_______	_______	_______	_______	_______	_______	_______	_______
Equals: Ending Balance	_______	_______	_______	_______	_______	_______	_______	_______

For information on ratio analysis, see Keeping Your Business on Track, Part III: Ratio Analysis.

Information in this publication is provided purely for educational purposes. No responsibility is assumed for any problems associated with the use of products or services mentioned. No endorsement of products or companies is intended, nor is criticism of unnamed products or companies implied.

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