Financial statement basics: How companies can track business health
Knowing the pulse of your business’s performance and health should be a top priority.
Financial statements play a big role in understanding where the business is at and where it is going. A lot of information can be gathered by reviewing the business’s financial activities on financial statements, which methodically lays out line items and costs.
Newcomers to the business world can turn to accounting software to create robust and responsive financial statements that pinpoint the company’s financial condition.
A financial statement will:
- Show how much money a business is making
- How much money a business is spending
- If the company has enough money to pay bills
- Level of debt
- Financial ratios
These insights can guide organizational decisions. For instance, a business leader might decide to shorten payment deadlines based on how well the company is able to cover debts.
Financial statements will always come in handy, during up and down times. There are other circumstances when they will become indispensable to managing day-to-day operations.
Thinking about business expansion? Want to hire more people?
Any time a business leader faces an important decision that will move the organization in a new direction, a financial statement can shine light on the path ahead.
Whenever a company reaches out for outside funding, potential investors will ask about financial details that are best illustrated via financial statements and summaries.
An internal discussion and close review of the pertinent financial statements will give companies confidence and data support for the new direction they determine to embark.
Types of financial statements
A cash flow statement is realistically a critical statement that most business owners don’t understand or ever read. This report will capture incoming and outgoing funds covering a specific time period and can be viewed on a daily, weekly or monthly format.
In a nutshell, cash flow statements are used to determine how much cash is on hand at a particular moment, whether it’s in the positive or negative, where/how the funds are coming in and where/how they are going out. As such, this statement will reflect adjustments to the net income generated for purchases or sales made on credit.
To create this document, businesses would summarize cash flow from operations, investing and financing. Incoming and outgoing cash related to products, services and overhead fall under the operations section.
Cash flows from current investments (i.e. asset acquisitions) and financing activities (i.e. loans or lines of credit) are tracked as well.
Net increases and decreases are a component of this financial statement.
Balance sheets track business assets, or what’s owned by the organization, along with liabilities, or what’s owed by the organization, and owner’s equity.
Each current and noncurrent asset, liability and equity should be itemized on the balance sheet.
The process for tracking balance sheets includes listing assets, liabilities and equity in order. Current assets, which are most liquid, are listed before noncurrent assets, such as property, equipment and intangible assets.
The same order is used for liabilities.
Equity, then, is what’s left when liabilities are subtracted from assets.
An income statement (also known as a profit & loss statement or P&L) is simply a rundown of the company’s profit and losses over a period.
Income statements track income, cost of goods sold and expenses and gauge the profitability of the enterprise. Income statements should not be confused with cash. Profit does not equate to cash, specifically when there are outstanding receivables or payables. The income statement also does not account for payments made for asset acquisitions or loans, for example.
To create an income statement, businesses should track operating revenue then non-operating revenue. Next, cost of goods sold will determine gross profit. Operating expenses, non-operating expenses and total expenses follow in the tracking document.
Businesses should calculate earnings before interest and taxes, which is known as EBITDA and determined by subtracting all expenses from sales (before interest, taxes, depreciation and amortization).
At the end of the statement, net income or loss is listed.
Want a better understanding of these financial statements and their impact to your business? Our variety of business and advisory services, including CFO consults, are designed to support your operations (i.e. understanding your financial reports). This allows you to focus more time doing what you love the most, and that’s running your business.
Contact us to learn more about how we can partner together so you can reach and maintain your business intentions through thorough tracking of business operations and performance.