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Understanding Your Business' Financial Statements

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 on your business; they will provide a discipline for you to, on a regular basis—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 are comprised of three elements: the Profit & Loss or Income Statement, the Balance Sheet and the Cash Flow Statement.

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 compared to a prior period, the number of customers you currently have versus a prior period, the average revenue per customer, sales by sales person and a host of other analyses that will help you run your business better.

Balance Sheet example with explanations

The income statement, sometimes called the Profit & Loss Statement, provides you with a look 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 prior year or budget. The reports can also show you variances by dollars and percentages. You may look at information on a month-to-month or quarter-to-quarter basis so you can see which months/quarters are most profitable. Your expenses can be broken down by department, by class, or project. This will give you the ability to analyze the profitability of a particular project or revenue stream.

Profit & Loss (Income) Statement example with explanations

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 you that your accounts receivable increased by $10,000. This may be the result of billing, say, $25,000 for the month, but only collecting $15,000. The difference is the increase in receivables. There are a host of other possibilities why the difference between profit and cash in the bank. All of them are explained in the Cash Flow Statement—a very valuable tool!

Cash Flow Statement example with explanations

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