If you're in the process of buying a business, there's a whole lot of information to take in and digest. If you're not familiar with accounting terms and documents, it can be overwhelming, leaving you wondering just where to begin.
Here's a look at some of the basics of business financials and taxes that may provide some guidance about the questions to ask when buying a business.
When one talks about a company's financials, they are usually referring to three specific kinds of documents: balance sheet, income statement, and cash flow statement. The balance sheet is it a representation of the company's financial position at one specific point in time.
It details the current value of all the company’s assets as well as all liabilities and debts. Through analysis of the data found on the balance sheet, you not only get a clear view of the company's net worth, but you can also assess its liquidity (the ability to convert assets to cash quickly) and solvency.
You can find out more about how to prepare a balance sheet by clicking here.
A company's cash flow statement measures how money came in and was disbursed over a specified time period to see how the cash on hand has changed. It looks at monies received from cash sales, accounts receivable, and cash from loans and credit, as well as disbursements made for such expenses as payroll, accounts payable, rent, loan repayments, and others.
You can find out more about cash flow statements and how to prepare one here.
An income statement, also sometimes called a profit and loss statement, is used to show a company's profitability over a certain period of time. By listing all of the revenues received, as well as all of the operating expenses, you can clearly see how much money the company made or lost during that time.
Cash flow and income statements are similar, however, an income statement takes into account non-cash items, such as the depreciation of fixed assets, like equipment, fixtures, furniture, and computers.
Click here for a quick tutorial on how to write an income statement.
The IRS requires individuals, including sole proprietors and partners, who expect to owe in excess of $1000 in taxes at the time of filing to make quarterly estimated tax payments. The same is true of corporations that expect to owe $500 or more.
To estimate how much income tax may be payable on a company's revenues, you will need to estimate the adjusted gross income, taxable income, taxes, deductions, and credits for the year ahead. You may want to use the company's previous tax return as a starting point.
You'll find more detailed instructions, as well as a worksheet to help you with the process, on the IRS website.
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