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Small Business

 

Qualities Of Useful Financial Reports

As an entrepreneur, planning and implementing the accounting system of the business that you hope is going to make you money, it is important that your accounting system must produce information that are going to be useful to you and to those who are reading it.

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As an entrepreneur, planning and implementing the accounting system of the business that you hope is going to make you money, it is important that your accounting system must produce information that are going to be useful to you and to those who are reading it.

How do you do this? Information that a business is expected to present must be:

1. Understandable.

Naturally the information produced must be understandable. A guideline is to provide information that people, who are willing to understand it, can understand it: professionals or nonprofessionals. As a business owner, you have to think of the different accounting backgrounds of the different types of people who will be reading your reports and match that accordingly.

2. Relevant & Material

Relevance is the capacity of information to make a difference in a decision. It is important to report and disclose information that is relevant for anyone to make a decision. Accounting information must also deal with things that are significant enough to impact decisions that are made by those who use your financial reports.

3. Reliable

People must depend that the figures and the facts printed on your financial statements are true. How can you say that an information is reliable? It must be verifiable. Free from error. E.g. you can always look at a receipt to verify the amount of an expense. As you already know, when you get audited, you must verify all transactions that occurred in your business anyway.

4. Comparable & Consistent

Comparability relates to the ability of an information to be compared with those of other similar companies so that decision-makers can compare 'apples to apples' not 'apples to oranges'. However, Generally Accepted Accounting Principles (GAAP) allow for certain choices of different accounting methods for depreciation and inventory management.

5. Conservative

This applies mostly in situations where there is uncertainty of an outcome but you have to estimate what this outcome might be. The key is to choose the less pessimistic estimate. Of course this may not always be a wise decision if the chances of the less pessimistic estimate is very minute as opposed to the other choice(s).

This article was written for OrangesAndLime.com, to help creative individuals — artists, musicians, designers, illustrators and entertainers — build their own freelance businesses. Please note that this article serves as a guideline only. You should still seek professional advice regarding the matter because laws and practices change over time and they differ from country to country.

 

Understanding Financial Statements

Being an entrepreneur, you need to understand financial statements. Here is an introduction to the most crucial reporting statements you will need to know about.

forex, currency, currencies, trading, invest, wealth

In Financial Accounting - Reporting for those outside the business, the 3 most important financial statements, relevant for budding entrepreneurs are:

1. The Statement of Financial Position or the Balance Sheet

2. The Statement of Income or The Profit & Loss Statement

3. The Statement Of Cash Flows.

The Balance Sheet shows the business's assets, the liabilities, and the equities of a business. It is a 'snapshot' of the business economic resources at a certain date. That is why when you see one, it says something like, The Statement Of Financial Position as at dd/mm/yyyy.

Unlike a Balance Sheet that is a 'snapshot' of economic resources, the Profit and Loss Statement is a summary of the flows of earned revenues and incurred expenses of a business for a period of time. That is why when you see one, it says something like: Profit & Loss Statement for the year 200X.

The Statement of Cash Flows summarizes the 'cash' effects of the activities of a business for a period of time. These activities can be operating, investing and financing. The keyword that I would like to emphasize in the above definition is the word 'cash'. It only records activities that involved the transfer of cash.

I can summarize the above even further:

1. Your Balance Sheet shows you what you own and how you acquired them (borrowed from others or contributed by you).

2. Your Profit And Loss shows you how much you are expending each period and how much you are earning.

3. The statement of Cash Flows summarizes the exchange of cash in your operating, investing and financing activities.

I personally feel that for most freelancers, when starting a small business, attention should be placed on your Profit and Loss statement because that is your record of how much income is coming in and how much expenses is going out. Take a look at the revenue items there to know which activity is bringing in money and take a look at the expense items to see which ones are costing you the most and ask yourself whether those expenses are really necessary. Are there ways in which you could cut your costs?

Costs are what any entrepreneur has to control at the start of every business. No cost item should go by unnoticed or unmonitored. Their existence must be justified. Every dollar counts. Every dollar that gets tied up in one thing is a dollar that could otherwise be used somewhere else.

This article was written for OrangesAndLime.com, to help creative individuals — artists, musicians, designers, illustrators and entertainers — build their own freelance businesses. Please note that this article serves as a guideline only. You should still seek professional advice regarding the matter because laws and practices change over time and they differ from country to country.

 

Understanding Financial Statements

Being an entrepreneur, you need to understand financial statements. Here is an introduction to the most crucial reporting statements you will need to know about.

forex, currency, currencies, trading, invest, wealth

In Financial Accounting - Reporting for those outside the business, the 3 most important financial statements, relevant for budding entrepreneurs are:

1. The Statement of Financial Position or the Balance Sheet

2. The Statement of Income or The Profit & Loss Statement

3. The Statement Of Cash Flows.

The Balance Sheet shows the business's assets, the liabilities, and the equities of a business. It is a 'snapshot' of the business economic resources at a certain date. That is why when you see one, it says something like, The Statement Of Financial Position as at dd/mm/yyyy.

Unlike a Balance Sheet that is a 'snapshot' of economic resources, the Profit and Loss Statement is a summary of the flows of earned revenues and incurred expenses of a business for a period of time. That is why when you see one, it says something like: Profit & Loss Statement for the year 200X.

The Statement of Cash Flows summarizes the 'cash' effects of the activities of a business for a period of time. These activities can be operating, investing and financing. The keyword that I would like to emphasize in the above definition is the word 'cash'. It only records activities that involved the transfer of cash.

I can summarize the above even further:

1. Your Balance Sheet shows you what you own and how you acquired them (borrowed from others or contributed by you).

2. Your Profit And Loss shows you how much you are expending each period and how much you are earning.

3. The statement of Cash Flows summarizes the exchange of cash in your operating, investing and financing activities.

I personally feel that for most freelancers, when starting a small business, attention should be placed on your Profit and Loss statement because that is your record of how much income is coming in and how much expenses is going out. Take a look at the revenue items there to know which activity is bringing in money and take a look at the expense items to see which ones are costing you the most and ask yourself whether those expenses are really necessary. Are there ways in which you could cut your costs?

Costs are what any entrepreneur has to control at the start of every business. No cost item should go by unnoticed or unmonitored. Their existence must be justified. Every dollar counts. Every dollar that gets tied up in one thing is a dollar that could otherwise be used somewhere else.

This article was written for OrangesAndLime.com, to help creative individuals — artists, musicians, designers, illustrators and entertainers — build their own freelance businesses. Please note that this article serves as a guideline only. You should still seek professional advice regarding the matter because laws and practices change over time and they differ from country to country.




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