Basics 101: Knowing Your Financials
Running a business isn’t easy. Especially when you started it because you liked working in the business. When your love of the job spurs you to make it a career that you turn into a Company of your own, working on the business may end up being more than you bargained for. We talk a lot about ‘knowing your numbers’. You hear it from all sorts of industry leaders, consultants, and peers. You hear lingo like Items & Services List, Chart of Accounts, P&L, Balance Sheet, AR, AP, Assets, and Liabilities. If those make your head spin, remember the #1 rule – Don’t Panic. We’ll get that all sorted out right now.
Items & Services List
The name Items and Services says it all. It’s truly just that – a list of the items and services that your Company provides. When someone asks what kind of work your Company does and/or what do you sell, this list is likely the answer. These items and services are linked to Accounts that represent how the Company moves money around.
Think of Accounts as file folders. They hold and organize all the money coming in and going out of your business. Collectively, all of those file folders make up the Chart of Accounts. It’s basically a directory of all the Accounts used in the Company and acts as the cabinet that holds all the folders. Now that we’ve established what we do (Items & Services List) and where we track the money coming in and out (Chart of Accounts), we can run some reports to check the health of our Company.
Profit & Loss Statement
P&L is short for Profit & Loss Statement. This document shows the daily grind. It uses some of the accounts listed in the Chart of Accounts and puts them in order like a math problem. Income – Expenses = Net Income (your profit or loss for the time frame you’re looking at).
The Balance Sheet, Assets & Liabilities
For a more long-term perspective, a Balance Sheet looks at the overall balance of a Company by using another set of accounts listed in the Chart of Accounts; Assets and Liabilities. Assets include items like big purchases of equipment, as well as the money due from clients (Accounts Receivable, (AR)) and the balance in the Company checking and savings accounts. Liabilities include items like loans, payroll taxes that haven’t been paid just yet, as well as the money you owe your suppliers (Accounts Payable (AP)).
Bringing It All Together
By looking at the Profit & Loss Statement plus the Balance Sheet together, it will give you an overall status of the Company. Now, any and all of this is only going to be as good as the information you put into it. That means keeping track of bills, payments, expenses, etc., PLUS documenting it. By doing all of that for the Company, you’re enabling all of this to happen. That’s important for a number of reasons – tax savings, paying for purchases you didn’t make (yes, it happens) and for making sure you don’t miss out on getting paid for the work you do. The best news we can offer you from all of this is that – YOU’VE GOT THIS. By taking the first step of reviewing the basics, you’re one step closer to understanding the numbers behind your business!
Don’t want to go it alone? Let the Green Executive help you fast forward the process. All you have to do is setup a consultation and let us work 1:1 with you to get the systems you need right now in your business setup and running to benefit YOU! Setup a consultation here.