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What is a Profit and Loss statement?

Analytical profit and loss documents.

Owning a business comes with a lot of responsibilities. You may find wondering sometimes how do you know if your business is growing? How do you calculate how much you are bringing in your company? How do you report the financial operations? There are three main financial statements you need as a business owner, a cash flow statement, balance sheet statement, and a profit and loss statement. Today, we will be focusing on the profit and loss statement.

What is a profit and loss statement? A profit and loss statement is a financial summary of your company’s operations from a certain period of time. The main operational transactions are revenues, expenses, and net income. The formula for the profit and loss statement is subtracting the total expenses from the total revenues then the difference will identify the net income of the company.

Equation visual of profit and loss statement.

The revenue is the sales generated from what your company sells such as products or services. Then, you have your expenses. The expenses are what you subtract from the revenue that your company makes. The expenses include the cost of goods sold and operating expenses. They are the variable and fixed expenses that manufactures the company’s products and services production. The expense also includes the taxes, interest expense from loans, and other periodic payments. 

After subtracting the expenses from the company’s revenue, you finally have your net income. This will help measure the results of how well your business is performing financially from a certain period of time. Is your company earning profit? Is your company actually losing money? How can your company perform better financially? A profit and loss statement will help identify and analyze your finances. 

Woman on her laptop at a coffee shop reviewing her net income statement.

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Business Financial Fundamentals

  1. Business structure:

Every business needs to form a business structure. There several types of business structures such as sole proprietorship, partnership, corporation, nonprofit, limited liability company (LLC), and limited liability partnership (LLP). They all have different income tax implications so be sure to understand the difference and which resonates more with your business. 

  1. Cash Flow vs Profit:

Cash flow and profit are both financial metrics that are always used in every business but they are very different from each other. Cash flow analysis is understanding how money is being moved in and out of the business to areas such as operating, investing, and financing activities. Profit is the money that is left over after expenses.

3. Three critical business statements and how it affects your business:

A balance sheet is a summary of the financial balances of an individual or organization. It will help investors to see where the funding should go and help manage. 

An income statement is one of the financial statements of a company providing the company’s revenues and expenses during a particular period. It helps to see if your business is making profit or if there’s somewhere that needs to be fixed.

A cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents that come in and out of the company.This helps organize the money that the company is putting in and brings, and analysis what needs to improved.

4. Types of Business Insurance: 

Professional liability insurance “covers a business against negligence claims due to harm that results from mistakes or failure to perform”. This will help cover any legal expenses that you may encounter.

Property insurance covers equipment, signage, inventory and furniture for any fire or theft emergencies.

Workers’ compensation insurance should be added to a business’s insurance policy when hiring new staff members. In case of any emergency, it helps cover medical expenses or lost wages in the job. 

General liability insurance covers and protects your business from claims such as property damage, copyright infringement, or any other injuries.

Product liability insurance covers your business manufacturing products from claims and damages.

Business interruption insurance will help cover for the income loss from a disaster or catastrophic event that does occur which affects the business.

5. Proper policies, Agreements, and Contracts when hiring new staff: 

When hiring a new staff, it is important to let your staff know their rights and benefits. It protects the business from any lawsuits and complaints that may happen. Most of these documents also help manage how much money to withhold from employees’ wages for state income taxes. Here are important documents when onboarding new hires:

  • Form I-9
  • W-4
  • State new hire tax forms
  • New hire reporting
  • Offer letter
  • Employment agreement
  • Employee handbook acknowledgment
  • Direct deposit authorization
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High-Yield Savings Accounts: 4 With Over 1.50% APY

Did you know there are several ways to let your money make you money? Including, putting your money into a high-yield savings account. Yes, that’s all you have to do, is just put your money into an account that will pay you to keep it there. You can literally make money while you sleep! 

A traditional savings account is a great way to save your money and earn more over the years. However, most of the traditional banks require you to pay high fees but have low interest rates. The average rates from traditional banks goes from 0.01%-0.07% annual percentage yield (APY). With this type of rate, you are paying more for fees than interest earned on your traditional savings account.

Bar graph with online banks and traditional banks average APY.

Is there a better savings account where you can receive more money? Yes! high-yield savings accounts are online banking with higher annual percentage yield for consumers and have lower or no fees. They offer safety, growth, and ease of use. With a high-yield savings account your emergency funds can grow fast with over 1.50% APY.

A graphic of the benefits of high-yield savings accounts

While you are searching for a high-yield savings account, make sure you are looking for the ones that are insured with FDIC to protect your deposits from bank failures. Also, compare the rates and requirements that each one offers. Once you find the best one for you, complete the application online, deposit money, and begin saving! If you download the online bank app and turn on alerts for notifications, you can see how much you are saving each month!

Here are 4 high-yield savings accounts with over 1.50% APY, insured with FDIC, and $0 of monthly fees as of July 14th, 2022:

  1. BrioDirect          = 1.80% APY 
  2. CitBank             = 1.65% APY
  3. Bask Bank       = 1.61% APY 
  4. LendingClub     = 1.52% APY

Entrepreneur Documents List

As an entrepreneur, it is important to stay organized. Below is a list of documents that all entrepreneurs should have readily available at all times:

  1. Articles of Organization/Incorporation: set of documents filled with a government body to legally document the creation of a corporation.

It is important to fill out the Articles of Organization/Incorporation as an entrepreneur in order for your business endeavor to be recognized as a separate legal entity which can lead to avoiding higher tax obligations, fees, and losing their personal funds. 

  1. Bylaws: a legal document setting forth key rules and regulations governing the corporation’s day-to-day operations

Bylaws document the fundamentals of the company’s operation so it must be created with board members and recommended with an attorney. 

Legal document with pen.

  1. Operating Agreements: is a key document used by limited liability companies to outline the business’ financial and functional decisions including rules, regulations and provisions

As you form an LLC, operating agreements are expected to document the company’s financials and internal operations to clarify and protect your agreements. 

  1. Non-Disclosure Agreements: a contract by which one or more parties agree not to disclose confidential information that they have shared with each other as a necessary part of doing business together.

NDAs are best to have people to sign when you have confidential information that you want to protect in meetings when running a company. 


  1. Employee Contracts/Offer Letters: formal contract and documents with important details provided such as a kind of contract used in labour law to attribute rights, responsibilities between parties to a bargain, and expectations. 

When hiring a new employee to your company, they must be provided with employee contracts and offer letters so they are aware of their rights and expectations as they onboarding in the company and it is documented.

  1. EIN Number: Employer Identification Number, also known as the Federal Employer Identification Number or the Federal Tax Identification Number, is a unique nine-digit number assigned by the Internal Revenue Service to business entities operating in the United States for the purposes of identification

Every employee must have an EIN Number to file business taxes and establish business credit. It also helps set up a payroll system with ease. 


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How To Establish Business Credit

Learn step-by-step how to establish business credit

When it comes to business credit, most business owners do not realize the benefits. One of the biggest benefits of business credit is that it is entirely separate from your personal credit. However, to be able to leverage the many advantages business credit has to offer, your business needs to have a solid foundation. A solid business foundation includes entity formation, bookkeeping, and an active business bank account.

The first step in building a solid business foundation begins with the formation of your entity. The most common entity types are Limited Liability Company (LLCs) and Corporations. When you first start your business, it is important to register your business, apply for an Employer Identification Number (EIN), and apply for a DUNS number. Your EIN is a number similar to your social security number. It is how the IRS identifies your business. Your DUNS number is how your business is identified with the credit reporting agency Dun and Bradstreet.

Another important step to take before applying for business credit is to set up proper bookkeeping for your business and open a business bank account that can be linked to your bookkeeping software. Having proper bookkeeping in place will make it easier for you to prove that your business has adequate cash flow. Similarly, a business bank account separates your business expenses from your personal expenses which to accurately prove profit and loss  

Next is to establish trade lines with your suppliers. If you buy supplies, ingredients or other materials from third-party vendors, those purchases could help build your business credit. Many suppliers extend trade credit, which means they allow you to pay several days or weeks after you receive the inventory. If you have this type of accounts-payable relationship, ask your supplier to report your payments to a business credit bureau. Your business credit score will get a boost as long as you stick to the terms of the trade agreement.

You need at least three tradelines to get a Dun & Bradstreet Paydex score, which measures past payment history. Even if you don’t work with a lot of suppliers, you can set up tradelines with any small vendor, such as your water or office supplies distributor. If those vendors don’t report to a credit bureau, you can list them as a trade reference on your account, and Dun & Bradstreet will follow up to collect your trade data.

A business credit card can be one of the best tools for building business credit. Additionally, many business credit cards offer benefits and rewards for your spend, from cash back to travel points.

If you have thin or poor personal credit, you may want to begin your card search by improving your personal credit score, since many card issuers will use your personal history to evaluate creditworthiness. If that isn’t possible, applying for a secured credit card will likely be your best choice.

While secured cards typically don’t offer rewards and may have a low ceiling for how much you can spend, they can still be valuable for contributing to your business credit profile. And some issuers will allow you to upgrade to an unsecured card if you can demonstrate a consistent pattern of responsible repayment.

In conclusion, having a good foundation for your business is the key to being granted business credit. Once given, you can then leverage your business credit to scale your business. If you need help building your business’s foundation, apply to become a client of Fola Financial!