| As you consider which legal entity or | | | | current or long-term assets to pay ongoing expenses |
| entities--corporation, limited liability company, or limited | | | | during the current year, at the end of the year, the |
| partnership--you want to use for your business | | | | amount of your assets will be reduced by the |
| structure, the decisions you make will depend heavily | | | | amount of net loss. On the right hand side, your |
| on your current financial situation, both personal and | | | | Equity has gone down too. If you borrowed, say |
| professional. But do you know how to read a financial | | | | $10,000 to pay current operating expenses, at year |
| statement on your own? Do you know how to read | | | | end, your assets remain the same, but your liabilities |
| your own personal and business financial | | | | have increased by $10,000, lowering your net Equity |
| statements?Knowing how to do this is an essential | | | | or ownership in the company by that same $10,000.It |
| skill not just for entrepreneurs but for everyone. | | | | doesn't take a rocket scientist to figure out that if |
| However, for the entrepreneur having this skill can | | | | you continue on this path, you will quickly be in a |
| mean the difference between having a thriving | | | | very painful situation, because Liabilities carry their |
| business that continues to thrive and winding up in | | | | own cost. The cost of borrowing money is Interest, |
| bankruptcy. The annals of the bankruptcy courts are | | | | and if you are fortunate enough to borrow at only |
| strewn with cases of entrepreneurs who entrusted | | | | 10% interest (on unsecured debt) today, a year |
| their accounting to others and, not knowing how to | | | | from now, you will have to pay $11,000 to pay off |
| read the financial statements of their own | | | | the original $10,000 debt. This reduces your equity still |
| businesses, were surprised when they found that the | | | | further--unless you have used the borrowed funds to |
| business was ultimately unsustainable. The purpose of | | | | create more assets that increase in value at the |
| this article is to help prevent this from happening to | | | | same rate as the interest on your debt or, better |
| you--and to arm you with the skills you need to | | | | yet--at a higher rate.More to the point for deciding |
| structure your business to your benefit from the | | | | which business entities to use is that you need to |
| outset.Your Two Major Financial StatementsThere | | | | work out both your personal financial statements and |
| are two major financial statements that every | | | | those of your business(es). If you find, for example, |
| entrepreneur should know how to read and (ideally) | | | | that that you have significant salary or wage income |
| prepare or have prepared in their financial software | | | | in your personal financial statements that is causing |
| (we recommend QuickBooks):The Income Statement | | | | you to pay out high taxes (as reflected in your |
| The Income Statement (also known as the P&L or | | | | balance sheet), and you expect that your business |
| Profit and Loss Statement) offers a dynamic picture | | | | will generate some significant losses for the first |
| of the ebb and flow of your finances. Briefly, income | | | | several years, it would be advantageous to you to |
| statement shows first: A. Your various sources of | | | | use a business entity that is a flow-through entity. |
| income Then subtracts from that, B. Your expenses | | | | Losses incurred by your S-Corporation (or, if you |
| To give you the net result: Net Profit or Loss | | | | prefer, your Limited Partnership or your Limited |
| Typically, it is the result shown on this statement | | | | Liability Company) will flow onto your personal |
| that is the basis for your taxation by state and | | | | balance sheet to offset the salary or wage income |
| federal authorities at the end of the year. The net | | | | and thus reduce your tax liability.Moreover, in general, |
| income or loss (revenue outgo) is carried over onto | | | | if you want to draw up a roadmap to getting where |
| your second major financial statement: The Balance | | | | you want to go, you need to know your point of |
| Sheet.The Balance Sheet | | | | departure. Thus, preparing and understanding your |
| Offers you a snapshot of cumulative results of your | | | | personal and business financial statements is an |
| financial activities. It is made up of two columns: | | | | indispensable first step for your business |
| On the left side you have your AssetsOn the right | | | | planning.©Copyright Azur Pacific Associates |
| are listed your Liabilities and Owners/Shareholders | | | | 2006Germaine A. Hoston, Ph.D. is President and |
| Equity (or ownership in the business). The two | | | | Treasurer of Azur Pacific Associates, a consulting and |
| columns must be in balance, which is why this is called | | | | translation firm and distributor of the Secret Millionaire |
| a Balance Sheet.Assets=Liabilities + EquityIt's really | | | | Asset Security System and Eventis wealth-building |
| quite logical how the Income Statement and Balance | | | | courses. |
| Sheet relate to one another.If you have to use | | | | |