Ugh!! Whether we call it “Accounting”, “Bookkeeping” or “Finances”, we Digital Nomads probably have a love/hate relationship with the topic. The part we love is doing good work and getting paid for it all while having flexibility in where we do business from. Keeping track of that payment along with the costs involved in earning it, is the part we hate.
All frustration aside, good accounting can pay big benefits in running your business, planning for its future and, of course, at tax time because it results in three reports that can answer very critical questions:
In the United States, these are the three major financial statements used to track a business’s health:
- Income Statement – Is my business making money?
- Balance Sheet – Who owes the business money? Does the business owe money to anyone?
- Statement of Cash Flows – Where did all the money go?
That’s it – those are the three basic financial tools your business needs and what they tell you. Now, if you dare, we’ll dig into the details of each one just a little bit.
Whether you’re just starting your business or you’re already established, you need to have these three financial statements prepared each month and have a basic understanding of what they mean for the past, present and future of your business:
- Your Business’s Income Statement
At a high level, this document shows the amount of profit the business made and it has three main parts:
- A section showing the amount of money your business earned during that period from services it provided to customers – this is called Revenue. If your business provides more than one type of service, there may be a separate line item for each.
- The amount of money your business spent to provide those services to customers – this is called Cost of Services. There will be a separate line that subtotals each of these costs.
- The difference between these two amounts (Revenue minus Cost of Services) is called Net Income.
- If this amount is positive, your business made a profit during that period.
- If this amount is negative, your business incurred a loss during that period.
- Your Business’s Balance Sheet
This will also have three main sections:
- The first will list the main Assets for your business. This is what your business owns or has rights to. Items like computers and Accounts Receivable (money owed to the business by customers) belong here.
- The second will list the main Liabilities. This is what your business owes. Accounts Payable (money your business owes) and loans payable on equipment are examples.
- The third section is Owner’s Equity which represents the amount the owners have invested in the business.
- Your Business’s Statement of Cash Flows
This document really zeroes in on your business’s sources of cash and its uses of cash during the period. This is incredibly useful since it not only answers “Where did all the money go?” but also “Where did all this money come from?”
The first line will show how much cash the business had at the beginning of the period and then will have three major sections showing all the sources and uses of cash.
- The first section sums up how your business used its cash in Operating the business. Examples could be paying for office supplies, payments to your employees and receiving payment on an invoice you sent to a customer.
- Second, there will be a section summing up how much was cash used for Investing in the business. Items you’d see here might be cash spent on a new computer or possibly a loan made to a supplier.
- The third section will total the cash used in Financing the business. For most businesses this section will show how much cash was received from loans the business took out and payments made against those loans.
Finally, the statement will end with how much cash the business had at the end of the period. And, we all know that cash is GOOD!
If you let them, your financials will tell you very valuable and straight-forward information. What are your financials trying to tell you? Are they nothing but vexing? Do they even exist at all? Work with your accountant or bookkeeper today and start tapping into your business’s GPS.