Being able to read your business' financial statements is an important part of being a business owner. Knowing what to look for and how to analyze certain numbers on the balance sheet or income statement on a given day helps you get a sense of how your business is doing and will help you to make better decisions and meet your goals.
The balance sheet will provide you a picture of your company's position at a certain date. It gives you the detail of the Assets, Liabilities and Shareholders’ Equity at that specific point in time. The balance sheet is integral when planning and setting goals.
Cash is the first indicator your company’s financial position. If a company generates a lot of cash it is often an indication that they are doing a good job of meeting customer expectations and getting paid in a timely manner. A low cash balance should raise a red flag, some companies can run with a low cash balance but this is not a common occurrence. Looking at how your assets are split between current and non-current gives you a picture of how solvent your company is. Current assets are any assess that can be converted to cash within one year, i.e. cash, inventories, receivables.
Liabilities are classified as current and non-current, similarly to assets. Any liabilities due within the next year would be considered a current liability. When planning and setting goals looking at current assets compared to current liabilities can tell you if you are in a good position to pay your short term liabilities and payables in a timely manner.
Equity represents how much shareholders/partners/owners have claim to in the company. Paid-in-capital shows you the initial investment that was made in the company. Retained earnings represents the cumulated earnings you have chosen to keep invested in the company rather than taking as distributions or dividends.
The income statement will provide you a picture of your company's income, expenses, gains & losses over a period of time. This information is essential in tax planning as well as goal setting. It gives you a picture of the company’s financial footing and helps in timely decision making.
Your income statement gives you your sales or service revenue, cost of goods sold, general and administrative expenses and other income and expenses. All these items break down into your net income or loss. By comparing your current income statement for the current period to prior periods you can gage how well your company is doing and help in budgeting. Comparing your income statement this way can also allow you see which expenses you may be over spending compared to prior years.
There are other aspects of financial statements including the cash flows which focuses on cash inflows and outflows, schedules of costs of goods sold and other expenses which give more details on expense, and notes to financial statements. All of these help you as a business owner make business decisions on a day to day basis. Being able to read and analyze these numbers will help you to make better decisions on how to spend smart, budget and set goals to help your business thrive.