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Chapter 8. Taxes: Don't Get Caught Aslee... > Taking a Look at Your Track Record

Taking a Look at Your Track Record

By now it's probably apparent that one of the reasons to maintain your financial books is so that you can see how you're doing in business. If you own a small business and either sell or produce products or provide a service to customers, you will want to know if you're making a profit, covering your expenses, or operating in the red or the black. The best way to see how you're doing is to create the following three statements:

  • Profit and Loss Statement (P&L)— This statement is straightforward and to the point. A P&L shows your income or revenue and your expenses for a given period. If you do a monthly P&L, then you will be able to see your progress each month. These statements help you to compare one month, or quarter, or year to another.

  • Cash Flow Statement— A cash flow statement analyzes the money that comes in versus the money that goes out. From the cash flow statement, you can project cash flow trends and determine if you will have enough money to pay your bills and operate your business. If you are a young business just starting out then having a cash flow projection will tell you whether or not you can cover expenses.

  • Balance Sheet— A balance sheet shows you what your business is worth. It indicates the difference between your businesses' assets and liabilities. Assets would include cash, accounts receivable, inventory, and equipment. Liabilities would include such entities as your debts to creditors, loans to the bank, accounts payable, and income taxes.


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