Understanding Financial Statements

Financial statements are only valuable if you are able to understand and
interpret the information they contain. Unless you have a background in
accounting, understanding your business’ financial statements can be
like trying to understand a foreign language.
Although financial statements can be formatted in a variety of ways,
most business owners rely on four key statements to measure the
condition of their business:

1. Income Statements-The income statement measures your company’s income
and expenses over a given period of time such as a year, a quarter or a
month. In many ways, these statements represent your business’ ability
to function profitably. They highlight trends in sales and expenses that
may require you to adjust the way you are doing business. When expenses
are subtracted from income on the income statement, the result is either
net income or net loss.

2. Balance Sheet-The balance sheet tracks your businesses assets and
liabilities. It is called a balance sheet because it is based on an
equation that must balance in order to be valid: assets = liabilities +
owner equity. Unlike the income statement, the balance sheet does not
measure your business over a period of time. Instead, it is a snapshot
of your business at a given point in time. By comparing balance sheets
from month-to-month or year-to-year, you can measure your business’
growth in significant terms.

3. Statements of Capital-The statement of capital measures changes in
your company’s capital situation over a period of time. In other words,
the capital statement places a dollar value on how much your ownership
of the company is worth. These statements are usually completed at the
end of an accounting cycle to determine how much money the business has
earned for the owner throughout the year. That amount — the net income —
can be used however the owner sees fit.

4. Cash Flow Statements-The cash flow statement measures the actual cash
running in and out of your business over a specific period of time. This
can be extremely valuable because it helps you track from where the cash
is coming, such as: operating activities, investing activities,
financing activities or changes in investment values. You may have a
whole lot of cash but if it is all coming from loans, you may be in
trouble. Properly interpreted, the cash flow statement will give you the
information you need to make the necessary adjustments.