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Financial Statement Refresher: How to Read the Reports

Financial Statement Refresher: How to Read the Reports Photo by Austin Distel on Unsplash

Every small business owner gets bogged down and behind at some point. However, the one business practice that you must consistently perform is reading financial statements. To really understand the position of your business, you need consistent reviews of your balance sheet, income statement, and cash flow.

These statements work together to answer to the question, “How am I doing?”

If you don’t ask the question, you may find yourself sunk before you know it. The review gives you time to pivot and react to any problems before it’s too late. Or, a review may reveal when it’s time to scale and propel your business.

The Purpose Of The Reports

Each statement provides a picture that together form a mosaic to give you the full sense of your business’s success / struggles.

  • Balance Sheet. A company’s balance sheet is the financial statement that gives a snapshot of your business’s health at that moment. It reports assets and liabilities at the point in time of the publication.
  • Income Statement. The income statement is where earnings are reported; this is a critical line to understand the health of your business. An income statement represents a slice of time, a given period, and can tell the story of your business over the past year, quarter, or even month.
  • Cash Flow. The cash flow statement is critical as it shows the use of a company’s cash. In the business world, cash is king, and improper use of cash, or failure to bring cash into the company, can lead to the demise of the company even when the other financial statements look good.

The Nuts And Bolts: What To Review

A balance sheet is broken down into two sections, which must balance in order to have an accurate statement. If the liabilities are greater than the assets, there is a problem to address. So, the goal is to continually check the balance between Assets (Current (short term) Assets; Cash, Accounts Receivable, and Inventory, and Long-Term Assets; Land, Buildings, Equipment, etc.) and Liabilities (Current (short term) Accounts payable, short term loans, and Long-Term Liabilities, usually only long-term loans).

An income statement shows net sales and cost of goods or services, yielding a company’s gross margin so that you can calculate the percent-of-profit for the reported period. Below the margin line, other operating expenses such as Selling, General, and Administrative (SG&A), depreciation, interest (positive or negative) are listed to show the income before taxes. Then, after taxes are calculated and deducted, the company’s net income (or loss) is shown.

The cash flow statement tracks cash into and out of the company over a set period. The cash at the beginning plus-or-minus all lines in the statement lead to the cash at the end of the period, which is then transferred to the top line of the next period. Cash flow tracks cash receipts and payments, including salaries, payments to suppliers, and receipts from customers; equipment purchase or sale (listed in whole on the cash flow, but may be depreciated on the balance sheet); and draws on loans or loan payments.

Consistent Review Is Key

Together, these financial statements reveal how your business is doing. Without consistent review, you may find yourself out of cash, full of liabilities, and out of business.

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