In order to survive, there are some accounting documents that must be available in your business.
The management of a small business requires the preparation of documents for the filing of business taxes; application for business loans; the internal tracking of revenues; expenses and profitability. There are four main accounting documents that are essential for the performance of the functions listed above:
1. Balance Sheet:
A balance sheet is a financial statement. It reports the assets, liabilities and shareholding of a business at a specified point in time. Even more, it provides a snapshot of what the business owns and owes. Also, it portrays what its owners own in the business.
It is often supported by the Income Statement and Cash Flow Statement. Hence, the Balance Sheet is a core financial statement used in valuing the net worth of a business.
The goal of the bookkeeper (and the business) is to maintain a balanced balance sheet. Albeit, this is a condition in which everything the business owns (total assets) equals its liabilities plus the valuation of what the owners own in the business.
2. Income Statement:
The Income Statement is often called the profit and loss statement. Furthermore, it is a summary of the revenues and expenses of the business during the year. Also, it is used in calculating the net profit or loss of the business in a trading year.
The income statement is also critical to determining the break-even point of a start-up business, and the profitability of a business over a period.
3. Cash Flow Statement:
A business needs enough cash on hand to cover its expenses. Hence, failure to achieve and maintain this state of affairs can have a negative effect on the financial health of a business.
The Cash Flow Statement is the accounting document dedicated to tracking the cash flow of the business. It is the document that reflects the inflow of revenues and the outflow of expenses that result from the trading activities of the business during a specified period, like during a month or in a quarter.
The inflows come from the sale of goods and the collection of payments on invoices. However, outflows come from such trading activities as the procurement of inventory, the funding of payroll, and settlement of marketing costs and other overhead costs.
4. Revenue Forecast:
The revenue forecast is a prediction of the financial year ahead. It is an educated guess of how much revenue the business is likely to generate. Consequently, this will enable the business to project how much it can spend and what its profit margin is likely to be.
A properly prepared revenue forecast will help the business to determine if it can afford to hire new staff; whether it can launch a new marketing campaign; or, what its monthly payment will be if it takes a business loan.
The revenue forecast helps to decide these kinds of questions with a reasonable degree of certainty. Also, it helps the business to stay on its budget through the financial year.
An appreciation of the balance sheet, income statement, cash flow statement and revenue forecast will give the Small Business Owner invaluable insight into the successful management of the business.
If you need help in coming to grips with these vital accounting documents that you need to run your business, visit the SME Clinic at https:/smefinance.org/sme-clinic/.