It is very important to have Personal Financial Statement to know how much are you worth? Many self-made business people, famously in his best-selling blockbuster emphasize the importance of creating personal financial statement.
It helps the entrepreneur track their income and change in net worth. At their simplest, personal financial statements include a statement of net worth and a cash-based statement of income. If you run your own business or you are an independent contractor you should already track income and expenses. Perhaps on software such as Quicken or Mint because, at minimum, you will need them to prepare your tax returns. By preparing your statement of net worth along with it you are giving yourself a powerful tool. It helps you understand if you’re getting richer or poorer and why. Read on for more information on why personal financial statements are such powerful tools, and how to prepare them.
Why you need it?
In case someone wants to see them. If you are applying for a loan with the Small Business Administration then there are people who would be very interested in seeing. What your resources are and how responsible you are in managing them? To examine where the money is coming from and where it is going. This is a hard look at the income side of the statement. I like to put my expenses into categories and compare how much I am spending in each category. It can be basis for preparing the budget for the next year, or for making goals for the next year. All of these financially smart men stress the importance of financial literacy and that financial literacy begins with financial statement. So, have I sold you on the value of preparing your personal financial statements yet? Great! So next you will want to know how.
How to get net worth?
The essence of a statement of net worth is the total of items. It is that you own that have value less total of your debts and future obligations equals your net worth. Investopedia has an excellent page that gives the details of what to consider for assets and liabilities. Essence of cash-based statement of income is total income less total expenses plus any increase in value of your assets. They were not the result of putting more cash into them equals your net income and it is the same as the change in your net worth from the prior year to the current year. Got it?
There are two essential elements to any financial statements. The first is that the statement of net worth, which is called the Statement of Financial Condition. Here, has at minimum two consecutive time periods represented and the second is that the statement of income.
Here called the Statement of Changes in Net Worth, sums up to the difference between the two periods. To put it simply, your statement of income explains change in net worth over period of time, usually of year. So, if you can get your net assets correct and then your income has to be correct as well. You may have to back into it but there you are!