But, deciphering these statements really isn’t that difficult – even if you don’t have a financial background. Once you’ve read our financial statement analysis (and free business advice!), you won’t feel as intimidated the next time you hear the term “financial statement.”
So, let’s walk through a financial statement analysis.
Financial statements should be an essential tool in your cash flow management toolbox. That’s because these statements follow the money (or cash flow). They give a detailed report about how the money entered your company, where it went and how it’s currently being used.
It’s important to be familiar with the following statements:
Financial statement analysis of an income statement: This document reviews how much money your company made – or lost – during a given period of time, usually quarterly or annually. It reveals your gross earnings, along with the expenses related to making that income. In other words, it provides a stark, unbiased look at your net income for the period.
Income statements begin by reviewing your sales total (gross sales) for the period. Then, as you proceed through the document, you’ll notice deductions listed for each specific type of operating expense connected with those sales. After you’ve subtracted these costs, you’ll arrive at your actual earnings for the period at the bottom of the report.
Financial statement analysis of cash flow statements: Here you’ll get a reading on your company’s incoming and outgoing cash. (Obviously, this is a key report for cash flow management.)
A cash flow statement doesn’t focus on your profit picture – that’s the role of the income statement. Instead, this report reveals if your company generated cash – and tells you how much cash is readily available for paying bills, salaries and other operational expenses.
Cash flow statements look at your net cash increase or decrease from the previous period. Most reports divide this into categories such as operational, financing and investing activities.
Financial statement analysis of balance sheets:
“Assets” is a broad term. It refers to anything your company “owns” that provides value. This can mean your building(s) – if you own the property – along with equipment, inventory, vehicles, etc. But, it also includes cash, investments and more.
Meanwhile, “liabilities” represent debts. Again, this encompasses a lot of ground. It can refer to taxes owed, payroll, loans, rental payments, supplier costs and other obligations.
Think of a balance sheet as a picture about your business for a given period. Usually, your assets will be listed on the left side of the report in order of how easily each asset can turn into cash. On the right side, you’ll see your liabilities, typically in order of their due date. They can be classified as short-term or long-term liabilities (which mean expenses that you don’t expect to pay off within 12 months).
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The bottom line when it comes to financial statements: they’re highly useful documents for your business – and not difficult to understand once you know the basics. Let us know if you have any questions about this or how they relate to cash flow management.
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