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Bulletin #3003, Keeping Your Business on Track, Part II

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.

For information about UMaine Extension programs and resources, visit extension.umaine.edu.
Find more of our publications and books at extensionpubs.umext.maine.edu.

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 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


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.

© 2002

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