A Guide to Financial Statements for Small Business Owners
Published on May 31, 2023
One of the biggest challenges small business owners face is managing finances – it’s a complex task that requires time, effort, and a solid understanding of financial principles. Just looking at the numbers can lead to decision paralysis. I know that feeling all too well.
If you’ve been wondering how to make a financial statement for your small business, you need to prepare three key documents: balance sheets, income statements, and cash flow statements. It’s also important to remember that mastering your financial statements is not an overnight process.
Whether you’re a new business owner in Sydney or a seasoned entrepreneur in Moss Vale, knowing how to go about the systematic process of record-keeping is key to steering your business towards sustainable growth.
How to Make a Financial Statement for Small Business
1. Balance Sheets
The only equation you need to know is this: Assets = Liabilities + Owner’s Equity. This equation ensures that your business is in a state of balance, hence the name “balance sheet”. At its core, it gives you a snapshot of your business’s financial health at a specific point in time.
Assets are what a business owns. These can be as tangible as machinery and inventory, or as intangible as intellectual property and goodwill. As a small business owner in Bowral, for example, if you own a boutique, your assets could include your stock, cash in the bank, and your shop’s fittings.
Next, we have liabilities, which essentially are what a business owes. This could be in the form of short-term liabilities such as accounts payable and salaries, or long-term liabilities like loans or mortgages.
As for owner’s equity, also known as shareholder’s equity, this is what’s left when you subtract your liabilities from your assets. It represents the owner’s claim on the business assets.
Pro tip
The Australian Accounting Standards Board (AASB) provides guidelines to ensure consistency and transparency in financial reporting across all businesses. Familiarising yourself with these standards will help keep your brand legally compliant.
2. Income Statements (Profit and Loss Statements)
This financial statement provides a summary of your revenues, costs, and expenses over a period. It essentially answers the question, “Is my business making or losing money?”
The income statement starts with revenues, which is all the income from your business operations. We then have the costs of goods sold (COGS). This represents all the costs directly associated with producing your goods or services.
As for operating expenses, these are the costs incurred in the day-to-day operations of your business that are not directly tied to the production of goods or services. It includes expenses like rent, utilities, and salaries. By subtracting the COGS and operating expenses from your revenue, you’ll arrive at your operating profit (the number that every business owner and investor wants to know).
After accounting for non-operating incomes and expenses, interest, and taxes, we arrive at the net income, the proverbial “bottom line”. This is the amount your business has earned or lost over a given period. By regularly reviewing your income statement, you can identify trends, track performance, and implement strategies for growth.
Let’s have a small bakery business in Mittagong, Australia as a case in point. Revenue includes all the sales of bread, pastries, cakes, and other bakery items. COGS would encompass the cost of ingredients (e.g., flour, sugar, butter, eggs, yeast, packaging materials) and direct labour costs.
Next, rent is an operating expense that the bakery would have to pay for the space it occupies. This includes the bakery shop itself as well as any additional kitchen or storage areas. Other operating expenses include utilities (e.g., electricity, gas, water) and wages paid to employees in various roles such as sales staff, bakers, and marketers.
3. Cash Flow Statements
A cash flow statement records how cash enters and leaves your business over a period of time. It’s divided into three sections: operating activities, investing activities, and financing activities.
Many profitable businesses, especially small businesses, have been brought to their knees due to poor cash flow management. Regularly reviewing your cash flow statement can help you understand your business’s liquidity, solvency, and overall financial flexibility.
Again, I highly recommend that you follow AASB guidelines to ensure that your financial statements meet the required standards.
Related articles:
Small Business Tax Deductions in Australia
How Much Should a Small Business Spend on Bookkeeping?
Consider Automating the Entire Process
The manual process of maintaining and interpreting financial statements can be time-consuming and prone to human error. This is where automation steps in. Automating your financial management system can streamline your operations, provide real-time insights, and free up time to focus on core business activities.
Here’s an article from Investopedia on the bookkeeping softwares you could choose from.
Related article: Should a Small Business Use a Bookkeeper All Year Round?
Make a Statement in Your Industry
Financial acumen can set you apart in your industry. It’s the foundation of informed decision-making, smart investments, and overall, a thriving business. But you don’t have to do it alone.
Here at The Bookkeeping Studio, we’re dedicated to empowering Australian small business owners to take control of their finances with confidence and precision. Whether you’re a consulting CEO in Queensland or an e-commerce business owner in New South Wales, we offer personalised services that cater to the specific bookkeeping needs of your business. Your success is our success. Together, let’s make a bold statement in your industry.
Hey, my name’s Bindi Gethen! I’m the founder of The Bookkeeping Studio in Australia. With over 15 years of experience in the industry, I have a deep understanding of the challenges that small and medium-sized business owners face when it comes to managing their finances.
I am passionate about empowering my clients with the financial information they need to succeed. My team and I pride ourselves on our commitment to exceptional value, accuracy, and confidentiality. Our virtual bookkeeping services include payroll, budgets, and management reporting, among others.
Not to toot our own horn, but we can assure you that you won’t find a bookkeeping partner like us anywhere else in the Southern Highlands.
