Do I Really Need To Worry About Balance Sheets Or Cash Flow Statements?
I got this question in my Profit First For Microgym group and I wanted to answer it for all of you. It was noticed that Profit First is very income statement driven, so what do you need to do with the balance sheet? Let’s talk about this!
The First thing you need to know
The cash flow statement is rarely used and honestly not something you need to worry about at all. Your cash flow statement is really just an outcome, it is pulling numbers from the other statements.
The Profit and loss statement (also known as an income statement) is formatted in a way where you start with income on the top, then your expenses, with the net income on the bottom.
Accrual Basis Or Cash Basis?
A lot of time Businesses try to run their profit and loss statement on an accrual basis, meaning your booking income when the invoice is generated as opposed to when you receive the payment. In quickbooks you will see you have the option to run your report under the accrual or cash basis. We recommend cash basis, this is important because then you are dealing with the actual money received and went out.
What About A Balance Sheet?
Profit first is based a lot on the Profit and Loss statement, however the balance sheet is really important. So, let’s first clarify, what a balance sheet even is… A balance sheet is simply a summary of the financial balances of an individual or organization.
So, why is it important to have?
Take this example, you buy equipment and when you buy larger equipment, this doesn’t show up on the profit and loss statement. But the cash left your business… The balance sheet will show the increase in value for your business based on whatever it is you purchased. That cash out flow doesn’t show up on the Profit and loss statement but it does show on the balance sheet, this is a big reason why the balance sheet is so important.
Another big reason why it is important is in the case of loans. When you make a payment on a loan a portion of that payment is going towards interest and part of it goes to the principal. The interest payment will go on the profit and loss statement as an expense, but the balance reduction from paying the principal does not. This will go in the liability section of your balance sheet. Even if I am reconciling my bank account in the books every month, this would not necessarily reconcile my loan balance. The balance sheet is as important as the profit and loss statement, it just carries only a few entries that would not be found on the profit and loss statement.
Interested in learning a bit more? Check out this quick video I made for the members of my Profit First For Microgyms group. Then, let me know if you have any follow up questions.
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