The goal of your new or growing business is to bring in more money than you pay out. The difference is the profit. It is vital as you plan your consulting business to establish a trustworthy system that tracks and manages income, expenses, and profits. The tracking system includes various financial statements, including the income statement, balance sheet, and cash flow statements.
An income statement is a financial document that shows how gross income (income before expenses) is converted into net income (income after expenses). Gross income or revenue is sometimes called the top line and net income (before taxes, etc.) is the bottom line. Because the statement considers profits and losses, it also is referred to as a profit and loss (P&L) statement.
Some entrepreneurs and accountants refer to an income statement as an operating statement or an earnings report. There are slight differences between these reports, but the terms often are used interchangeably. For consistency, use the most accepted: income statement.
In the world of finance, a balance sheet is a summary of assets, liabilities, and equity. If you've applied for a personal loan, the application included a simplified balance sheet structure:
What do you own (assets)?
What do you owe (liabilities)?
What is your net worth (assets minus liabilities)?
Your business will have a more developed balance sheet than you personally do. It will include more detail and require more verification. Your business's investors want to know exactly what they are getting into — and they'll want assurance that you know, too.
A balance sheet is also called a statement of financial position. It is a snapshot of your business on a specific date. It may be the first day of operation, the beginning of the third year, or on the date that you sell your business. It's called a balance sheet because the financial components on one side (assets) must equal the financial components on the other (liabilities and equity). Equity is also known as capital, net worth, ownership equity, and other terms.
Where did the term balance sheet come from?
The term “balance sheet” is based on double-entry recordkeeping that always makes two entries for every transaction or event. The purchase of a building (asset) is offset by a reduction in cash and credit (liabilities). The difference is your business's equity in the building. The two entries must balance each other.
Cash Flow Statement
Cash flow is the tracking of actual income and expenses as cash or other liquid assets. In earlier times, cash flow statements were called statement of change in financial position and flow of funds statement. These titles help describe their purpose as records of where the money is coming from, where it is going, and when. Another way of looking at income and expenses is:
Income = sources of cash
Expense = uses of cash
Obviously, you cannot use more cash than you receive. Only the federal government can print more money.
Once you've written — and rewritten — your business plan, remember to update the executive summary. Finally, set it aside for awhile, then reread it with a fresh eye to make sure it clearly answers your primary question: How can I make a profit as a consultant?