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.
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 Figure 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
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.
Call 800.287.0274 (in Maine), or 207.581.3188, for information on publications and program offerings from University of Maine Cooperative Extension, or visit extension.umaine.edu.
In complying with the letter and spirit of applicable laws and pursuing its own goals of diversity, the University of Maine System does not discriminate on the grounds of race, color, religion, sex, sexual orientation, transgender status, gender, gender identity or expression, ethnicity, national origin, citizenship status, familial status, ancestry, age, disability physical or mental, genetic information, or veterans or military status in employment, education, and all other programs and activities. The University provides reasonable accommodations to qualified individuals with disabilities upon request. The following person has been designated to handle inquiries regarding non-discrimination policies: Director of Equal Opportunity, 5713 Chadbourne Hall, Room 412, University of Maine, Orono, ME 04469-5713, 207.581.1226, TTY 711 (Maine Relay System).
