How often do you receive a set of financial reports for your business? Now let me ask, how often do you actually review those financial reports? The majority of the answers we receive are "Financial Reports?" or "I don't need those". Is this how you answered?
If so, let me ask you one last question. How do you measure the success of your business and strategic goals?
Let's face it, you wear many hats and are probably the busiest person you know. Finding or making time to read the financial reports - income statement, the balance sheet and the statement of cash flows, can be virtually impossible. Amongst all these obstacles and urgent demands, also lingers the all intrusive fact that many business owners have very little training or experience in interpreting numbers from a financial report, so they may not understand them or understand their importance.
But the numbers revealed through these financial reports play an immense role in making decisions, planning strategies, determining success, estimating failures, selling your business, and telling the world your companies story.
One of the easiest ways to learn more and get more from your financial statements is to meet with your Bookkeeper, Accountant, or CPA at the very least annually for a financial check-up/check-in. Don't just limit yourself to tax time. Ask he or she to explain in plain language what key metrics they focus on or recommend reviewing or if any numbers stand out for being lower or higher than normal.
Taking this one step further, if you can follow the directions to a recipe, read a nutrition label, or keep up with the latest sports stats, you can quickly learn to read basic financial reports.
There are three main financial reports. They are: (1) balance sheets; (2) income statements; and (3) cash flow statements. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Cash flow statements show the exchange of money between a company and the outside world also over a period of time.
A balance sheet consists of three parts, Assets, Liabilities, and Owners Equity.
Assets = Liabilities + Owners Equity
Assets are items or things of value that your business owns. These items can generally be sold or used by the business to provided services that can be sold. See a trend yet? For the most part assets will typically be physical property like a truck, building, or service equipment but at times intangible objects can be classified as assets as well like patents, trademarks, or investments. Don't forget that cash is also classified as an asset!
Liabilities are anything owed to someone else. This can include all kinds of obligations like loans, accounts payable, wages, taxes, waste clean-up, and even rent. Current liabilities are generally due within a year of the balance sheet date and are listed at the top of the right-hand column and then totaled, followed by a list of long-term liabilities, those obligations that will not become due for more than a year.
Owners' Equity aka net assets or net worth is what is left over after everything that you owe has been deducted. It is what you would have left over if you decided to sell your business, pay everyone you owe, and walk away. Since the asset amounts report the cost of the assets at the time of the transaction—or less—they do not reflect current fair market values. Valuing a practice can be extremely complex and therefore should not replace a comprehensive valuation by an expert when considering buying or selling an existing practice.
The income statement aka Profit and Loss Statement shows revenues, expenses, gains, and losses but it does not show cash receipts (money you receive) nor cash disbursements (money you pay out).
Profit - Cost of Goods Sold = Gross Profit
The income statement is important because it shows the profitability of a company over a specific time period or interval (usually for a year or some portion of a year) specified in its heading.
An organized and well-maintained income statement can allow you to see how profitable you business really is and take the guessing game out of it. It can give you insight into whether or not you should focus on more profitable product lines or curb unnecessary expenses. It also shows you how much cash is left over to potentially grow the business, pay your salary as owner, and cover any debt. Thinking about obtaining a business loan? When investors look at your business plan, they will use your income statement to assess the level of risk involved in extending credit or venture capital your way.
Cash Flow Statement
The Cash Flow Statement aka Statement of Cash Flow summarizes cash coming in or going out of a business during a given accounting period and classifies them under three heads, namely, cash flows from operating, investing and financing activities. While many of the same categories can be found on the Cash Flow Statement , Income Statement and Balance Sheet; the Cash Flow Statement reflects the actual amount of money the company receives from its operations and not a projected number.
Operating cash flows from the principal revenue generation activities such as sale and purchase of goods and services.
Investing cash flows are cash in-flows and out-flows related to activities that are intended to generate income and cash flows in future.
Financing activities cash flows include the sources of cash from investors or banks.
The Cash Flow Statement can be seen as the bottom line and is valuable in measuring the strength, profitability and long-term future outlook for a company. It can help business owners determine if the company has enough cash to pay expenses now or in the future. By studying the cash flow statement, an owner or investor can get a clear picture of how much cash a company generates and gain a solid understanding of the financial well being of a company, since typically the more cash that's available for business operations, the better.
The above mentioned financial reports open a window for education, decision-making and strategic planning. Want to grow your business, open another office, or even sell? Your success in meeting any of your goals lies within the numbers found in these reports. Don't just rely on luck and guessing, make strategic decisions like a boss!