AROUND THE INDUSTRY
Financial Clarity:
A Key to Thriving Business Operations By Matthew Everson, Fractional Controller, Blackline Solutions LLC
When starting a business, we plan
what products or services to sell, how to acquire customers, what inputs are needed and how to meet our customers’ needs. We often think through potential costs and how to price our products and services. Yet many times, we overlook an important missing link: how to keep a clean set of books. As an old saying goes, “If you don’t know your numbers, you don’t know your business.” Your books should provide three important financial statements: an income statement (also known as profit and loss/P&L), a balance sheet and a cash flow statement. Each of these presents different information and has different uses, but each offers an important view into the health and direction of your business.
Income Statement
The income statement summarizes all income and expenses the business incurs over a period of time and provides a net income/profit (or loss) as the difference between total income and total expenses. This statement includes things like revenue from sales or services, costs for supplies or materials, payroll and labor expenses, payments to and credits from vendors, and interest income or payments. An accurate income statement will show both the business gross margin (after cost of goods or services sold, or COGS) and net margin (after all operating expenses). When analyzed over time, the income statement will reveal whether the business is growing or contracting. Likewise, it is one of the main documents used to determine how much may be owed in taxes. Sounds simple, right? However, the challenge comes in getting the right things recorded, in the right places, on the income statement. For instance, 28 NURSERY & LANDSCAPE NOTES || FALL 2023
the purchase of a business vehicle almost always is not an expense but a transfer of cash to a fixed asset on the balance sheet. Likewise, putting the appropriate expenses in COGS is vital to understanding the profitability of the business. Without having an accurate gross margin, it is very difficult to determine how growth in customers or sales will impact the bottom line.
Balance Sheet
The balance sheet lists all the assets, liabilities and equity a business holds. Assets include balances of checking and savings accounts; receivables like monies owed by customers; prepaid expenses; fixed assets such as vehicles, buildings and large pieces of equipment; and long-term loans owed by others to the business. Liabilities include credit card balances, credit lines, payables
like vendor invoices, payroll liabilities like benefits and taxes owed, and longterm loans. Equity includes partner contributions to or distributions from the business, as well as retained earnings over the course of business operations. Many businesses ignore their balance sheet to focus on the income statement, but valuable information can be found on the balance sheet as well. If accounts receivable is growing, for instance, that could represent a collections or payment issue and almost always results in a reduction in cash flow for the business. If liabilities like credit cards or credit lines increase consistently, this could be another sign that the business has a cash flow problem. Consistent unpaid payroll liabilities need to be investigated, due to the tax and legal requirements surrounding them.
