Business Marketing Plan: Financial Terminology
People who are planning a business often hyperventilate when they hear the term financial statements, as if someone just told them that the rest of the conversation would take place in an arcane foreign language with no translation assistance.
Well, here’s good news. You can master the language of business finance by understanding three key terms:
Income statement: This report, also called earnings reports or profit-and-loss statement, summarizes how much money your business earned and spent up until the minute the report was run. It reports your revenues over a given period of time and then subtracts all the costs of doing business over that same period to arrive at your net profit. Don’t be confused; they’re all one and the same.
Balance sheet: This report captures a financial snapshot of your business at a particular moment in time, usually the very end of a month or year. The top half of the balance sheet tallies up your company’s assets (the things your business owns that have monetary value).
The bottom half combines your company’s liabilities (the money your business owes) with your equity (the portion of your company’s assets that you own as opposed to what you’ve borrowed and owe). The top and bottom portions of this report must balance each other out — in other words assets must equal the total of liabilities and owner equity — hence the name.
Cash-flow statement: This financial report tracks money that flows in and out of your business over a given period of time (weekly, monthly, quarterly, yearly, or over a period of years.)
The top half of your cash-flow statement details funds coming in and going out of your company over the statement period; the bottom half shows the resulting changes in your cash position. The top and bottom halves must match up in order to reconcile the net effect of the inflow and outflow of money with the difference in cash holdings over the report period.