| As you consider which legal entity or | | | | Statement and Balance Sheet relate to one |
| entities--corporation, limited liability | | | | another. If you have to use current or |
| company, or limited partnership--you want to | | | | long-term assets to pay ongoing expenses |
| use for your business structure, the | | | | during the current year, at the end of the |
| decisions you make will depend heavily on | | | | year, the amount of your assets will be |
| your current financial situation, both | | | | reduced by the amount of net loss. On the |
| personal and professional. But do you know | | | | right hand side, your Equity has gone down |
| how to read a financial statement on your | | | | too. If you borrowed, say $10,000 to pay |
| own? Do you know how to read your own | | | | current operating expenses, at year end, your |
| personal and business financial statements? | | | | assets remain the same, but your liabilities |
| Knowing how to do this is an essential skill | | | | have increased by $10,000, lowering your net |
| not just for entrepreneurs but for everyone. | | | | Equity or ownership in the company by that |
| However, for the entrepreneur having this | | | | same $10,000. It doesn't take a rocket |
| skill can mean the difference between having | | | | scientist to figure out that if you continue |
| a thriving business that continues to thrive | | | | on this path, you will quickly be in a very |
| and winding up in bankruptcy. The annals of | | | | painful situation, because Liabilities carry |
| the bankruptcy courts are strewn with cases | | | | their own cost. The cost of borrowing money |
| of entrepreneurs who entrusted their | | | | is Interest, and if you are fortunate enough |
| accounting to others and, not knowing how to | | | | to borrow at only 10% interest (on unsecured |
| read the financial statements of their own | | | | debt) today, a year from now, you will have |
| businesses, were surprised when they found | | | | to pay $11,000 to pay off the original |
| that the business was ultimately | | | | $10,000 debt. This reduces your equity still |
| unsustainable. The purpose of this article is | | | | further--unless you have used the borrowed |
| to help prevent this from happening to | | | | funds to create more assets that increase in |
| you--and to arm you with the skills you need | | | | value at the same rate as the interest on |
| to structure your business to your benefit | | | | your debt or, better yet--at a higher rate. |
| from the outset. Your Two Major Financial | | | | More to the point for deciding which business |
| Statements There are two major financial | | | | entities to use is that you need to work out |
| statements that every entrepreneur should | | | | both your personal financial statements and |
| know how to read and (ideally) prepare or | | | | those of your business(es). If you find, for |
| have prepared in their financial software (we | | | | example, that that you have significant |
| recommend QuickBooks): The Income Statement | | | | salary or wage income in your personal |
| The Income Statement (also known as the P&L | | | | financial statements that is causing you to |
| or Profit and Loss Statement) offers a | | | | pay out high taxes (as reflected in your |
| dynamic picture of the ebb and flow of your | | | | balance sheet), and you expect that your |
| finances. Briefly, income statement shows | | | | business will generate some significant |
| first: A. Your various sources of income Then | | | | losses for the first several years, it would |
| subtracts from that, B. Your expenses To give | | | | be advantageous to you to use a business |
| you the net result: Net Profit or Loss | | | | entity that is a flow-through entity. Losses |
| Typically, it is the result shown on this | | | | incurred by your S-Corporation (or, if you |
| statement that is the basis for your taxation | | | | prefer, your Limited Partnership or your |
| by state and federal authorities at the end | | | | Limited Liability Company) will flow onto |
| of the year. The net income or loss (revenue | | | | your personal balance sheet to offset the |
| outgo) is carried over onto your second major | | | | salary or wage income and thus reduce your |
| financial statement: The Balance Sheet. The | | | | tax liability. Moreover, in general, if you |
| Balance Sheet Offers you a snapshot of | | | | want to draw up a roadmap to getting where |
| cumulative results of your financial | | | | you want to go, you need to know your point |
| activities. It is made up of two columns: On | | | | of departure. Thus, preparing and |
| the left side you have your Assets On the | | | | understanding your personal and business |
| right are listed your Liabilities and Owners | | | | financial statements is an indispensable |
| Shareholders Equity (or ownership in the | | | | first step for your business planning. |
| business). The two columns must be in | | | | |
| balance, which is why this is called a | | | | More articles from this pro: A. Hoston, |
| Balance Sheet. Assets=Liabilities + Equity | | | | Ph.D. |
| It's really quite logical how the Income | | | | |