In the startup era, it’s easier than ever to launch a new business.
With barriers to entry for new ventures at historic lows, it’s now extremely common to see aspiring entrepreneurs from all walks of life – including many without any type of formal business training.
Financial Statement Basics
Accounting may not be a glorified part of the modern hustle, but today’s infographic from The Business Backer shows why understanding and interpreting financial statements is important for any founder.
Whether you have the next big idea or find yourself grinding away at a side hustle, understanding the basics of business accounting will help you prepare for the next step of entrepreneurial success.
A financial statement has three main parts: the balance sheet, the income statement, and the cash flow statement.
It’s worth noting that 82% of small businesses fail because they experience cash flow problems, so the latter statement is of particular importance.
What They Do
Here are the basics on each type of statement, and why they are important:
1. Balance Sheet
The balance sheet presents a company’s financial position at the end of a specified date. It provides a snapshot of a company’s assets, liabilities, and shareholders’ equity. This statement essentially shows what a company owns and owes.
2. Income Statement
An income statement is a report that shows how much revenue a company earned over a specific time period. This is perhaps the most intuitive financial statement, as it ultimately shows the company’s profitability – a metric that even the most accounting-allergic business owner would watch quite closely!
3. Cash Flow Statement
A cash flow statement reports the company’s inflows and outflows of cash during a period of time. A company can be profitable, but still be experiencing cash flow difficulties. If not enough money is coming in the door, or if there is a significant lead time to receive revenue, then it’s possible for a company to not meet its short-term liabilities.