Gateway Commercial Finance

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 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

More About Business Financial Records

More Resources