Are you a novice when it comes to finance? When folks speak about income statements, balance sheets, cash flow and equity do you sometimes wonder what they mean? Is balancing your checkbook the extent of your financial understanding?
It’s never to late to learn more about financing. While there are several types of financial statements, we’re going to share information about an Income Statement and a Balance Sheet. Let’s start with the Income Statement.
An Income Statement looks at your finances (revenues or money in, expenses and expenditures, and whether you have a profit or loss). While an Income Statement is generally used in businesses, small or large, it can also have a place in your personal finances. It is important to understand the revenue or money that comes in (pay check, commissions, purchases of products, etc.) and the amount of your expenditures (cost of living or running a business), and whether you are spending less, or more than you are bringing in. If you are spending more than you are making or your business is bringing in, there are only two things to do to get your finances back in order: increase the amount of revenue and/or decrease the amount of your expenditures. While credit might be a short term solution, one of the challenges of credit is that you are paying for something that has already happened. A profit/loss statement is the part of the Income Statement which lets you know how you are doing.
A Balance Sheet is different that an Income Statement. A Balance Sheet includes information about your assets, liabilities, and the equity you have. Financial Assets are usually more liquid than other tangible assets like real estate. Liquid means you have access to the money immediately. One common liability can be a contractual obligation, a commitment to “deliver cash” to another entity (payment on a car, unpaid invoice for goods received). Equity is the difference between your assets and your liabilities. We generally think about equity in relationship to houses, cars, or other items which we can sell, hopefully for more than we owe on them.
If you are new to understanding finances, don’t hesitate to connect with GFI and talk through your options. Please follow the link below and GFI will be in touch.