How much do I need to know about accounting and bookkeeping?
Since numbers constitute the language of business, the more you know about this language, the better you will understand your business and the better will be your decisions. As a minimum, you should understand your bookkeeping system. This means you should understand how your money is spent and how much money you have coming in. You should also be able to read and understand the two basic summary financial statements: balance sheet and income statement.
Why are financial projections necessary?
Financial projections are estimates of future business activities. By estimating the future, you have a target to shoot at. You have a frame of reference, even if the projection is not highly accurate. The chief value of financial projections for a business owner is not so much the attempt to predict the future with accuracy, as it is a plan to set a target or goal to work toward.
What financial statements will I need?
You should prepare and understand two basic financial statements:
The balance sheet, which is a record of assets, liabilities and capital; and
The income (profit and loss) statement, a summary of your earnings and expenses over a given period of time.
What is a balance sheet?
Often referred to as the basic business financial statement, the balance sheet shows three things about a business: assets, liabilities, and owner's equity. Assets are things that are owned by the business. Liabilities are things that are owed to others. Owner's equity is the difference between assets and liabilities.
What is an income statement?
An income statement (often called profit and loss statement or P&L) is the scorecard for business. It shows the revenue, expenses and profit or loss. It shows these things for some period of time, usually a month or a year. An income statement is usually titled “Income Statement for X Business for the period January 1 to December 31.”
What is a cash flow statement?
The simplest form of cash flow statement is a listing of cash coming into the business and cash going out. You don't record anything else – just cash you get and cash you pay out. If it is either cash received or cash paid, it is listed. If it is not cash, it is not listed.
What is equity?
Equity has two different, but related meanings. On the one hand it is the term applied to the money the owner puts into the business – money that is not borrowed or is borrowed from relatives without any requirement to pay it back. Equity also means the same as “net worth,” which is the difference between the assets and liabilities of a business. It is the portion of the assets that the owner would get after all the liabilities were paid. Equity is one of two sources of capital for a business. The other is debt. Equity comes from the owner and debt comes from others, usually banks or other financing agencies.
What is capital?
To operate any type of business activity, you need things. These things are different from business to business, but usually include equipment, tools, office equipment, vehicles, computers, etc. These assets are purchased with money. Money is usually referred to as capital.
Is it better to lease or buy the store/plant and equipment?
This is a good question and needs to be considered carefully. Leasing does not tie up your cash; a disadvantage is that the item then has no resale or salvage value since you do not own it. Careful weighing of alternatives and a cost analysis will help you make the best decision.
Sources: US Small Business Administration / SCORE.
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