A personal financial statement clearly details your personal finances in an understandable fashion. It is a very important document for borrowers seeking a business loan application. It lets lenders instantly glean your financial assets and liabilities. In particular, if you’re married, the personal financial statement might also contain your partner’s assets and liabilities. It can also contain non-personal assets like accounts receivable, store cards and loans.
The personal financial statement is often called your W-2 or your IRS Schedule B. It must be submitted to the IRS with your tax return and if you’re self-employed, a schedule C. Because it’s a statement of your total income, most business owners prefer to submit their personal statement along with their tax returns. When you submit your income tax return, be sure to include all your receipts for every source of income other than business (which should be on Schedule C). Also, make sure to submit copies of all other receipts and pay stubs. If you’re unsure of the requirements for a certain item, ask the employee auditor.
Most people think that the purpose of a personal financial statement is to tell them how they spend their money, but there are many other reasons that one might submit one. People will often submit this to show landlords how much they make, to show banks how much they spend on a variety of items including mortgage interest and insurance and to show credit card companies how managing expenses really interferes with earning potential. Other documents that can be submitted with your personal statement include retirement plans and current income statements. If you’re looking for loan applications or want to learn more about a specific line of credit or loan, consult the bank, credit union, mortgage company, or consumer reporting agency to be sure that your financial statements will be appropriate.
The purpose of a personal financial statement isn’t to judge your worth as an individual, but it’s to help you understand your own financial situation and how it relates to your goals for financial freedom. It gives you insight into your habits, whether they’re good or bad, and your overall spending and budgeting habits. By taking an honest and thorough look at your finances, you’ll have a better idea of how to maintain and grow your wealth. If you’ve been paying attention, but haven’t taken a closer look, now is the time to do so.
There are two main factors that are used to determine what type of personal financial statement you need. One is disposable income, which refers to the money you have left after you subtract your expenses from your income. The second factor is positive cash flow, which gauges your ability to pay off your debts. For example, if you’re using your income towards your mortgage but spending the money on entertainment and restaurants, you may have a negative cash flow. However, if you’re putting your mortgage on hold due to lack of funds and are able to pay your bills promptly, you have a positive cash flow.
When you create a personal financial statement, you have two main categories to consider: your personal assets (which should include property such as real estate) and your liabilities. Your assets should include things such as stocks, bonds, jewelry and vehicles. These are considered “liquid”, since they can be easily sold in case of bankruptcy. Liabilities, on the other hand, are anything you owe other people, such as rent or mortgage. These will generally be included in your liabilities, along with outstanding business loans or taxes.
To create your personal financial statement, start by creating a comprehensive balance sheet. This includes a description of your current net worth (what you would be worth if you were an owner of the business you’re currently in) as well as your net worth as an asset. Next, list your personal assets individually. List your real estate, equities held in mutual funds, accounts receivable, inventory and your bank balances. Keep in mind that any current outstanding debt will also be reflected here. Now that your balance sheet is completed, calculate your net worth using the following formula: net worth divided by your current market value (equity minus liabilities).
If the value of your assets is negative, this means that you have a negative net worth. If this is the case, you will want to obtain a small business administration loan to increase your cash flow. On your personal financial statement, the balance sheet should not be the only basis for calculating your net worth. You must also take into account the value of your personal assets, your current debts, and your net worth as determined by the small business administration loan you obtain.