Basics of Business Finance
The basics of business finance are not nearly as complicated as they may seem. It is often a good idea to hire an experience accountant to handle the business side of things, but it is equally important that you understand the terms used and able to read reports.
Accounts Receivable and Payables
Commonly referred to as AP and AR, the receivables and payables are the cash flow of the business. Account receivable is the money owed to the business for products or services; it is not the same as profit. Depending on the business, receivables can be applied to a number of accounts, such as, labor and materials, or separated by department if the business has more than one.
Accounts payable is what the business owes to others. Payments are applied to bills from suppliers for materials, utilities, payroll, insurance and rent/bank loan.
Profit and Loss
Profit and Loss is also referred to as P&L. At the end of each quarter and fiscal year, a business must look closely at its profit and loss. A business must subtract the cost of the services or merchandise from the earnings or revenue generated. Any item or service normally has an upfront cost to the business. It could be materials or time spent doing research; this is the cost of goods.
Yearly Statements
A business must show the following statements at the end of each year.
- Profit and loss
- Cash flow statement- similar to a bank register, this shows the cash coming in and out of the business and give a beginning and ending balance.
- Balance sheet- compiles the receivables, cash, P&L and Equity; this gives the total assets and liabilities.