Initial Finance Documents for TKD Woodworking

Therefore, I have done some reading on financial documentation for small businesses and side hustles, and so I have started creating those documents for TKD Woodworking. I will be using accrual based accounting (vs. simpler cash-based) to track my finances.

The three basic finance documents for a business are:

  1. Budget/Profit & Loss Statement: A document, which shows, by month, the amount of money you are bringing in and the money you are spending to create the products/services. This is what many people think of when they do a family budget.
  2. Net Worth Statement:  A listing of the assets the company possesses (real estate, machinery, raw materials, etc.), the cash and accounts receivable (what is owed the company), as well as the debt and accounts payable (bills the company owes). All of this rolls up to the overall value of the company for that “snapshot” in time. 
  3. Cash Flow Statement: With the accrual based accounting system, you often log in expenses and income after a sale. This leads to better tracking and tax accounting, but can lead to a major issue. You may be actually spending cash, but not accounting for it in the P&L statement until months later. You need a third report, cash flow statement, to track the in/out flow of cash in the business – or you may run out of cash while still appearing to be “profitable.”

Each of these reports are linked and effect each other (ex. you can spend money in the cash flow, and increase the net worth statement with inventory, but not affect the P&L statement until you sell the items). The idea behind them is to record the base/start, and track them as the year progresses – in order to look for variances and changes, which need to be addressed. Once the year is up, they are the foundational documents for figuring out taxes.

For my P&L statement/budget, I arrived at a sales plan that assumed I’d start selling halfway through the year, and sell three (3) of each item I’m building. Based on that and current spending (remember, I’m having to purchase raw materials – which impacts my cash flow – but not getting real credit for it re: taxes until I sell something) my P&L looks like this:

Area Annual
Sales Revenue $3,518.94
Cost-of-Goods Sold Expense ($1,148.71)
Gross Margin $2,370.23
Operating Expenses ($1,407.58)
Earnings before interest and Income Tax $962.66
Interest Expense $0.00
Earnings before income tax $962.66
Income Tax Expense ($362.03)
Net Income $600.63

For the Net Worth, I am in a little bit of a pickle. For most companies, the equipment and workspace would be considered part of their assets. However, I am using my shop at home (in my garage) and the machinery (table saw, band saw, etc.) that I already own. The result is that my net worth is actually rather low to start. I am adding in the initial startup case ($3,000 – cost of some checks) and the material costs for the inventory I have built so far.

Assets
2/15/2020
Cash $2,973.65
   
Accounts Receivable $0.00
Inventories $232.42
Prepaid Expenses $0.00
Subtotal of current assets $3,206.07
Property, plant and equipment $0.00
Accumulated Depreciation $0.00
Cost less accumulated depreciation $0
Total Assets $3,206.07
Liabilities and Owner’s Equity
2/15/2020
Advanced payments from Customers $0.00
Accounts Payable $0.00
Accrued Expenses Payable $0.00
Short-term notes payable $0.00
Subtotal of current liabilities $0.00
Long-term notes payable $0.00
Total Liabilities $0.00
Owner’s Equity – invested capital $3,232.42
Owner’s Equity – retained earnings $0.00
Total Liabilities and Owner’s Equity $3,232.42

Another interesting feature of this for the future is that if I purchase tools/machinery in the future for the company and eventually leave/sell out – I will need to separate those items from my personal equipment. More paperwork!

Finally, the cash flow. I have started tracking what I have spent so far, and my expected cash outflows going forward. I put in roughly $639.60 before I started up the company in early February (for inventory, training, some tools, etc.) – so I added that to my initial cash pile.

Cash Flow from Operating Activities Annual
Cash collections from revenue $3,639.60
Cash payments for Expenses ($696.19)
Total $2,943.41
Cash Flow from Investing Activities
Investments in new long-term operating assets $0.00
Cash Flow from Financing Activities
Increase in short-term notes payable $0.00
Increase in long-term notes payable $0.00
Issuance of additional capital stock shares $0.00
Cash distributions from profit to shareowners $0.00
Total $0.00
Net Increase of cash during year $2,943.41
Beginning Cash Balance $0.00
Ending Cash Balance $2,943.41

The last two things I did for the company’s financials is setup a separate business account at a bank (where the $3K was deposited) and to get a business credit card – where I will charge all my future business expenses. As I noted previously, you need to keep your business and personal charges separate if you want to be successful in this (and prevent the possibility of being sued and losing your personal assets).

With the finances in order, it is time to move onto my next steps for the business. Those consist of:

  • Creating a website and building a marketing plan (March)
  • Complete building of samples to determine time/cost for each as well as potential shipping costs (April)
  • Acquire sufficient insurance to protect myself and the business (May)
  • Begin selling on Etsy, Craig’s List and Craft Shows (June)

I will let you know how I am progressing

I hope your own efforts are bearing fruit!

Mr. 39 Months

One thought on “Initial Finance Documents for TKD Woodworking”

  1. When I started my business in 2008, I just started selling — even before a formal website or business cards or financial statements. If there are no sales, there’s no business. Sales also gives you more useful numbers to track — what the market will bear, how long the sales cycle is, how many leads you need before someone buys, best source of customers, etc. I have a services business so I didn’t need to invest in equipment, and I can see how that large upfront investment would require calculations that I didn’t have to make, so certainly agree that planning is important. But I have seen too many business owners (and I do this too) get distracted by things other than sales, when sales is king, queen, and ace of spades in a business.

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