Page 8 - CBS Client Handbook

contractor pay, and marketing and advertising costs. To remain financially solid, businesses are often
encouraged to ​keep expenses as low as possible​.

Accounts receivable - ​Accounts receivable (A/R) is the amount that clients owe to a business. Usually
the business notifies the client by invoice of the amount owed, and if not paid, the debt is legally
enforceable. On a business’s balance sheet, accounts receivable is logged as an asset.

Cash flow - ​Your ​cash flow​ is the overall movement of funds through your business each month, including
income and expenses. For instance, cash flows into your business from clients and customers who
purchase your goods or services directly, or through the collection of debts in the form of accounts
receivable. On the other hand, cash flows out of your business to pay expenses like rent, utilities, taxes,
and accounts payable.

Cash flow statement - ​Businesses track general cash flow in a ​cash flow statement​ to determine
long-term ​solvency​, or their ability to pay their bills. A cash flow statement shows the money that entered
and exited a business during a specific period of time, and helps determine whether a company is solvent
or insolvent — meaning whether it can pay its bills or not. Similar to your personal checking account, if
more money is coming in than going out, your company is considered cash flow positive. On the other
hand, if you have more money going out than coming in, your company might need to cover any cash flow
shortage with a loan or line of credit.

Profit and loss - ​To remain financially healthy, a business must regularly generate more revenue from
the sale of its product or service than it costs to make that product or service. Say it costs a company $2
to make a T-shirt, but that company sells the T-shirt for $10. In this case, the company’s profit is $8. On
the other hand, a loss is money that a company, well, loses. For instance, if a T-shirt is stolen or
destroyed and can no longer be sold, it would be counted as a loss.

Income statement - ​The income statement is where you analyze your company’s profits and losses. As
such, it should come as no surprise that the income statement is also commonly referred to as the “profit
and loss statement.”

This document summarizes the profits and losses incurred during a specified period, which is usually a
fiscal quarter or a full calendar year. As such, it provides important information about your company’s
ability to generate profit by increasing its revenue, decreasing its losses, or a combination of both.

Net profit - ​In accounting jargon, your net profit might also be referred to as net income or net earnings.
And because it’s usually found on the last line of a company’s income statement, it’s often also called the
bottom line.

But just what is it? Well, this is the total amount a business has earned or lost at the end of a specified
accounting period, usually a month.

To determine your net profit, you would subtract all your business expenses from your total sales revenue
in order to determine just how much money your company has earned above and beyond the cost of
producing and selling your product or service. Net profit is usually used to determine whether a business’s
earnings are increasing or decreasing.

Putting it all together

As an entrepreneur or small business owner, you likely didn’t choose to run your own company solely for
the joy of creating and analyzing ​financial statements​. The good news is, there are accountants and

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