Your financial statements are basically your business’ report cards. They tell you how much your money has, how much money you owe, your income coming in, and your running expenses.
Each of the financial statements is very important in analyzing your business and is central to your business success. Nonetheless, this information is only useful if you can analyze and understand what is there.
In this article, we will go over each of the financial statements:
Balance Sheet:
Your balance sheet shows your company’s assets, liabilities, and owners’/shareholders equity. This information helps you determine what your company is worth and reviewing it can alert you of potential issues before they occur. The balance sheet shows your company’s position at any given time, for instance, it can show you that at 12/31, your company has $300,000 in cash and $100,000 in liabilities.
A balance sheet includes:
Assets: Items owned by the company that can be quantified. There are two types of assets current assets and long-term assets. The current assets are items that will be converted into cash within 12 months. For example, cash, inventory, etc. On the other hand, long-term assets are items that the company is planning to hold for longer than 12 months and usually it takes time for the company to convert these items to cash. For example Buildings, Furniture, etc.
Liabilities: This is money your company owes. This can include payroll, taxes, debt, rent, utilities, etc. Similar to assets, there are current liabilities and long-term liabilities.
Owners’ Equity: This is the amount you would have left after selling your assets and paying off the liabilities.
Income Statement:
An income statement, also known as the profit and loss statement (P&L) gives you a summary of your revenue and expenses during a period of time. While your balance sheet tells you what your business owns or owes, the income statement can help you see business trends and make comparisons over different periods. For example, it can tell you that your business has seasonality (high sales in some months, but very low in others). This can help you plan better and have cash flow ready to cover the expenses when the sales are low and not enough cash is coming in.
Here is an explanation of some of the terms you will see on your income statement:
Revenue: This is the money your business brings in through sales.
Expenses: This is the money the business spends on running the business
Cost of Goods Sold (COGS) or Cost of Sales (COS): The total cost of everything required to produce the products or services of your business.
Gross Profit: Total revenue minus cost of goods sold/cost of sales
Operating Income: Gross profit minus operating cost such as advertising, utilities, etc.
Depreciation: The value your assets you use to conduct have lost overtime.
Cash Flow Statement:
A cash flow statement gives you an in-depth look at where your business cash went during a specific period. It is a very good indicator as to how well your business can operate in the short and long term. As cash flow mismanagement is one of the top reasons why businesses fail, looking at the cash flow statement every month/quarter, depending on the business, is very important.
The cash flow statement has three sub-sections:
Cash Flow from Operating Activities
This section of the cash flow statement includes cash flow generated from providing goods and services and includes both revenue and expenses
Cash Flow from Investing Activities
This section shows cash resulting from a sale or a purchase of an asset.
Cash Flow from Financial Activities
This section represents cash generated from both equity and debt financing. It shows how the business raises the capital and repays it.
The cash flow statement is used to analyze which actions generate cash and help in making crucial decisions.
Before you go:
As you can see, each of these reports gives the company insight as to how the company is doing, but the best way to use these reports is to analyze them cumulatively. Each report will give you valuable information but may not give you the bigger picture. Successful entrepreneurs know the importance of understanding the financial health of a business and hire an accountant who will help them make better decisions. Outsourcing accounting is not an expense but an investment in your business. When you are ready to outsource, we will love to help you make your business even more successful. Contact us at saira@ssyaccounting.com.