Riding, training, showing, racing, taking care of the horses, getting and keeping good customers. These are some of the most important aspects to a "horse" business and accounting principles are generally considered to be a foreign language and a major hassle for most. However, with a little understanding of the financial statements, you will get a better idea how they can help you improve your business. Take note, it IS important to think of what you do AS a business. This is a quick and dirty article on, "What are these reports and what do they mean to me"?
Typically, the income statement (aka profit and loss) and balance sheet are statements used in business, but the third statement, the cash flow statement can be the most important, yet underused tool in helping your business. Unfortunately, this statement is applicable only to businesses using accrual method accounting and almost all equine businesses utilize the cash method of accounting.
The income statement is important because it shows the business profitability (during a specific time period). This statement does show your revenues, expenses, gains, and losses, but it doesn't show where the money is coming and going in the business. It's benefit is to show managers or potential investors if there was a loss or gain during the period being reported.
The balance sheet informs the reader of a company's financial position, but only for a specific moment in time. it enables an understanding of what a company owns AND owes, which is valuable information for bankers and creditors. The balance sheet equation is assets equal liabilities plus owner's equity; it shows how assets are financed: either by borrowing money (a liability) or by using the owner's money (owner's or shareholders' equity).
STATEMENT OF CASH FLOWS/CASH FLOW STATEMENT
This statement reports sources of cash and how it is used during a period of time. (the same as with the Income statement). It essentially explains the change in a company's cash and cash equivalents reported on the balance sheets at the beginning and the end of the accounting period. It is organized into cash coming from: operating activities, investing activities, financing activities and non-cash exchanges, interest and also income taxes paid.
The Statement of Cash Flows is similar to the Income Statement/P&L Report because it records a company's performance over a specified period of time. It also tells you how much actual money the company generated shows provides the company's ability to pay bills and creditors, finance growth and how well the company has managed its cash. Unfortunately, this statement is not actually a cash-basis report and so is used only in accrual-basis reporting companies, making it not meaningful to a cash-basis company. This is unfortunate because it is potentially a very valuable report that can provide much insight to a company.
Hopefully, this brief explanation will give you a better understanding of what these reports are, why they are needed and beneficial. Although no one ever has time in the horse business to read these reports, getting an understanding and an appreciation for their benefits, as well as finding time to actually look at them can really help improve your business. Please contact me if you ever need help getting your business books in order (352-229-4868). In the meantime, put profit first and trot on.