No matter your fleet size or how long you have been in business, it is crucial to understand basic accounting terms and financial documents. Like baseball standings on the sports page, accounting explains your company’s history, health and overall performance. Without understanding this information, you will not know if you are succeeding or failing. That limits your ability to make good decisions, operate effectively, and position your company for future growth.
To get started, here are a few basic accounting terms and definitions:
An asset is something of value that your company owns and can be converted into cash. This can include “current” assets like accounts receivable, inventory and available cash. It also includes “fixed” assets like real estate, buildings and equipment.
Liabilities are the debts and obligations of your business. They can include money owed on a loan, accounts payable, employee wages or taxes.
Equity is your ownership interest in the business. In accounting, equity is calculated when a company’s liabilities are subtracted from its assets. Whatever remains from that calculation is your equity. When liabilities are larger than assets, negative equity exists.
Revenue and Gains
Revenue is the amount of money that a company receives over a given period of time for the services it provides. On an income statement, revenue is also known as “top line” or “gross revenue.” Gains are one-time increases in revenue that are not a part of a company’s regular operations. Some examples of gains include the sale of equipment or real estate.
Expenses and Losses
Expenses are the costs to the company in performing its main operations. Losses are one-time transactions in which the company sells an asset for less than the amount it spent acquiring the asset.
Understanding financial management involves some familiarity with financial statements. The three most common documents that companies use to gauge their financial health and performance are the balance sheet, the income statement, and the cash flow statement.
The Balance Sheet
A balance sheet is a snapshot of your company’s financial standing at any given point in time. It measures the relationship among assets, liabilities and equity. It also calculates your company’s debt load and overall financial health. Here is a fictional example:
Jeff’s Trucking Service Balance Sheet, Dec. 31, 2014
|Total Liabilities/Owner's Equity||$18,300|
As you can tell from the balance sheet, Jeff’s Trucking is in pretty good shape, as the assets are much greater than the liabilities. Jeff has a large equity interest in the company.
The Income Statement
The income statement shows how money flows through the company over a period of time. It measures sales against costs. Unlike the balance sheet, the income statement covers a certain time period (usually a month, a quarter, or a year). Let’s see how the income looks for Jeff’s Trucking:
Jeff’s Trucking Service Income Sheet, 2014
Revenues and Gains
|Gain on Sale of Equipment||$5,000|
Expenses and Losses
|Loss on Sale of Equipment||$500|
As the income statement shows, the company was profitable, earning $14,500 in 2014.
The Cash Flow Statement
This document shows how much actual cash the company has on hand. It also projects future cash flow. This is an important statement for small businesses and entrepreneurs because it shows a company’s day-to-day financial health. While the income statement shows how your company performed in the past, the cash flow statement shows how cash is being generated or used. A company can show a profit on its income statement, yet still go out of business because of a temporary negative cash flow. Jeff’s Trucking Service - Cash Flow Statement, Month of December 2014
|Gain on Sale||($4,500)|
|Change in Receivables||$1,000|
|Operating Cash Flow||$12,000|
|Proceeds on Equipment Sales||$6,000|
|Investing Cash Flow||$5,400|
|Payments on Loans||($7,000)|
|Distributions to Owner||($4,000)|
|Financing Cash Flow||($11,000)|
|Net Cash Flow||$6,400|
You do not need to be a CPA to monitor your company’s financial activities. A basic understanding of general accounting terms and financial statements should be enough. Using a basic computer software program means you do not need to have a sophisticated, in-house accounting department.
If your company does have trained accounting personnel, they should be able to recommend the right kind of software for your organization. You can also consult an outside accountant for a software recommendation.
Sources: www.AccountingCoach.com, www.AccountingVerse.com, www.TheStreet.com