Understanding Your Business’ Financial Statements
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Financial Statements 101
You know your business better than anyone. You know your customers. You know your suppliers. You live and breathe it 24/7. So why do you need financial statements to tell you after the fact what is going on in your business? What can financial statements possibly tell me that I don’t already know? As your company grows and gets more complicated and you move further away from everyday tasks, your financial statements will provide you with a window into your business; they will provide discipline for you regularly—say, once a month, sit with your bookkeeper and focus on where you are, where you’ve been and where you are going. Financial statements can show you current results compared to prior periods, expenses as a percent of revenue, side-by-side monthly results, how your money is being spent, sales by customer comparisons, and a host of data to help you run your business.
Financial statements comprise the Profit & Loss or Income Statement, the Balance Sheet, and the Cash Flow Statement.
Balance Sheet
The balance sheet provides you with a look at your cash position, how much is owed to you by your customers, the value of your machinery, desks, computers, and other assets employed in your business, how much you owe your vendors, and other debts and your equity in the business. There are what are called subsidiary ledgers, which provide you with details of accounts such as accounts receivable and accounts payable. For example, you can look at your accounts receivable aging to see how much your customers owe you and which ones are behind in making payments. You can also compare your customers’ sales this period to a prior period, the number of customers you currently have versus a previous period, the average revenue per customer, sales by salesperson, and a host of other analyses that will help you run your business better.
Balance Sheet Example With Explanations
Place your browser or finger on the bold font titles to see explanations.
| ASSETS | Dec 31st,23 |
Dec 31st,22 |
$ Change |
% Change |
|---|---|---|---|---|
| Current Assets | ||||
28,130 |
22,123 |
6,007 |
27% |
|
Accounts Receivable |
48,100 |
39,688 |
8,412 |
21% |
Inventory |
58,150 |
38,020 |
20,130 |
53% |
Short-Term Investments |
13,000 |
5,500 |
7,500 |
136% |
| Total Current Assets | 147,380 |
105,331 |
42,049 |
40% |
| Fixed Assets | ||||
Real Estate |
425,600 |
419,650 |
5,950 |
1% |
Furniture & Equipment |
42,848 |
38,779 |
4,069 |
10% |
(35,381) |
(31,896) |
(-3,485) |
(11%) |
|
| Total Property & Equipment | 433,067 |
426,533 |
6,534 |
2% |
| Other Assets | ||||
Intangible Assets |
10,000 |
10,000 |
0 |
0% |
(3,056) |
(1,056) |
(2,000) |
(189%) |
|
| Total Other Assets | 6,944 |
8,944 |
(2,000) |
(22%) |
| TOTAL ASSETS | 587,391 |
540,808 |
46,583 |
9% |
| LIABILITIES & EQUITY | ||||
| LIABILITIES | ||||
| Current Liabilities | ||||
Accounts Payable |
19,863 |
15,960 |
3,903 |
24% |
Accrued Taxes |
5,273 |
3,355 |
1,918 |
57% |
Interest Payable |
4,335 |
7,943 |
(3,608) |
(45%) |
| Total Current Liabilities | 29,471 |
27,258 |
2,213 |
8% |
| Long-Term Liabilities | ||||
Bank Loans |
48,920 |
62,550 |
(13,630) |
(22%) |
| Total Long-Term Liabilities | 48,920 |
62,550 |
(13,630) |
(22%) |
| Total Liabilities | 78,391 |
89,808 |
(11,417) |
(13%) |
| Equity | ||||
450,000 |
450,000 |
0 |
0% |
|
59,000 |
1,000 |
58,000 |
5,800% |
|
| Total Equity | 509,000 |
451,000 |
58,000 |
13% |
| TOTAL LIABILITIES & EQUITY | 587,391 |
540,808 |
46,583 |
9% |
Income Statement
The income statement, a.k.a. the Profit & Loss Statement, looks at your sales, expenses, and profits for a specific period. That period may be a day, a week, a month, or year-to-date. You can look at results compared to the prior year or budget. The reports can also show you variances by dollars and percentages. You may look at the information month-to-month or quarter-to-quarter to see which months/quarters are most profitable. Your expenses can be broken down by department, class, or project. This will give you the ability to analyze the profitability of a particular project or revenue stream.
Profit & Loss (Income) Statement With Explanations
Place your browser or finger on the bold font titles to see explanations.
Dec 31st,23 |
Dec 31st,22 |
$ Change |
% Change |
|
|---|---|---|---|---|
| INCOME | ||||
Sales |
922,432 |
751,000 |
171,432 |
23% |
| Total Income | 922,432 |
751,000 |
171,432 |
23% |
| COST OF GOODS SOLD | ||||
Salaries |
325,000 |
293,000 |
32,000 |
11% |
Payroll Taxes |
48,750 |
43,950 |
4,800 |
11% |
Packing Supplies |
5,365 |
4,225 |
1,140 |
27% |
Independent Contractors |
30,464 |
21,000 |
9,464 |
45% |
Purchase of Resale Items |
98,010 |
87,500 |
10,510 |
12% |
Supplies |
15,230 |
25,000 |
(9,770) |
(39%) |
| Total Cost of Goods Sold | 522,819 |
474,675 |
48,144 |
10% |
| GROSS PROFIT | 399,613 |
276,325 |
123,288 |
45% |
| OPERATING EXPENSES | ||||
Postage and Delivery |
3,500 |
2,630 |
870 |
33% |
Advertising and Promotion |
14,260 |
11,110 |
3,150 |
28% |
Automobile Expense |
27,627 |
23,118 |
4,509 |
20% |
Bank Service Charges |
1,250 |
996 |
254 |
26% |
Phone and Internet |
2,400 |
2,400 |
0 |
0% |
Equipment Rental |
6,320 |
1,260 |
5,060 |
402% |
Insurance |
30,464 |
30,960 |
(496) |
(2%) |
Licenses and Fees |
2,200 |
2,200 |
0 |
0% |
Merchant Account Fees |
7,520 |
5,310 |
2,210 |
42% |
Office Supplies |
19,020 |
16,050 |
2,970 |
19% |
Outside Services |
12,000 |
11,580 |
420 |
4% |
Payroll |
25,000 |
24,000 |
1,000 |
4% |
Professional Fees |
560 |
1,650 |
(1,090) |
(66%) |
Travel |
2,600 |
5,820 |
(3,220) |
(55%) |
Utilities |
12,063 |
9,660 |
2,403 |
25% |
Amortization & Depreciation |
5,485 |
4,998 |
487 |
10% |
Other Expenses |
9,963 |
15,436 |
(5,473) |
(35%) |
| Total Operating Expenses | 182,232 |
169,178 |
13,054 |
8% |
| OPERATING INCOME | 217,381 |
107,147 |
110,234 |
103% |
| Less Interest Expense | 4,873 |
7,888 |
(3,015) |
(38%) |
| NET INCOME BEFORE TAXES | 212,508 |
99,259 |
113,249 |
114% |
| Less Income Taxes | 42,500 |
19,809 |
22,691 |
115% |
| NET INCOME | 170,008 |
79,450 |
90,558 |
114% |
Cash Flow Statement
If you have asked yourself why your cash increased less than the profit for the month, the cash flow statement can help you answer that question. One reason may be the following. Let’s say you made $10,000 in profit for the month, but your cash in the bank only increased by $1,000. Analyzing the Cash Flow Statement may show that your accounts receivable increased by $10,000. This may result from billing $25,000 for the month but only collecting $15,000. The difference is the increase in receivables. There are many other possibilities for the difference between profit and cash in the bank. All of them are explained in the Cash Flow Statement—a valuable tool!
Cash Flow Statement With Explanations
Place your browser or finger on the bold font titles to see explanations.
Dec 31st,23 |
|
|---|---|
| Cash at the beginning of year | 22,123 |
170,008 |
|
5,845 |
|
Decrease (Increase) in Inventories |
(20,130) |
Decrease (Increase) in Accounts Receivable |
(8,412) |
Increase (Decrease) in Accounts Payable |
3,903 |
Increase (Decrease) in Accrued Payable |
(1,690) |
| Cash Flow From Operations | 149,164 |
Capital Expenditures |
(10,019) |
Investments |
(7,500) |
| Cash Flow From Investing | (17,519) |
Increase in Long Term Debt |
(13,630) |
Dividends Paid |
(112,008) |
| Cash Flow From Financing | (125,638) |
| Net Increase in Cash | 6,007 |
| Cash at the End of Year | 28,130 |