The first step to understanding your finances, is looking at the balance sheet and the cash flow statement.
A balance sheet is a snapshot of your business's financial position at a particular time. It is divided into three parts: assets, liabilities and equity.
Assets are the items which add value to your business. Your balance sheet will show you what each asset is worth.
Liabilities are money you owe or need to pay back to your lenders.
Equity is the net worth of your business. It's the difference between the sum of your assets and the sum of your liabilities. If your equity is positive, it means that your liabilities are smaller than your total assets. If your equity is negative though, it means that your total liabilities or debts are greater than the total sum of your assets.
The question is, why is it called a balance sheet? What exactly is balancing here? Well, the idea here is that the total assets balance the total liabilities, plus the equity.
A cash flow statement is a summary of the cash transactions of your business, over a certain period of time. It is kind of like checking your bank balance, but better. Because it allows you to identify patterns and problems.
A cash flow statement is divided into five parts:
After looking at these two statements, you should be able to understand the financial position of your business, at any given time.
You'll be able to spot opportunities and risks. You'll be able to identify what you have and what you owe. And you will be able to communicate this information to lenders and investors.
For more information on balance sheets and cash flow, head to business.govt.nz