Regardless of the type of business you run, it’s a must to acquire the business’s financial situation. Everyone with a business understands that analyzing the financial situation of any business requires financial statements of that particular business.
Generally, Business owners avoid reading their statements and guess their business state according to the number of sales they are making as they find the financial documents hectic to read and understand in some cases. However, To grow any business a businessman needs to understand his/her business inside out and to do so, you have to analyze your financial statements. These are a few financial statements that successful business owners often analyze.
Income Statement
An income statement also called a Profit and loss statement helps to understand the business revenues, expenses, and profitability of a set period of time. This report is responsible for clarifying income generation, but it can also help you to:
- Understand the net profit or loss of a specific period
- Evaluate risk for stakeholders and creditors
- Determine expenses, costs, and revenue
- Determine gross and net profits
This statement basically provides you with the numbers that help you to realize the income and expense patterns of your business resulting in you understanding the trends and their impact on your business. The knowledge of this statement enables your leadership to make informed decisions.
Here are some things to do if you’re requested to analyze an income statement and are unsure of where to begin:
- Verify all of the math.
- Identify the conclusion.
- Consider the income sources.
- Check the expense categories.
- Now check the amounts: What are the biggest expenses?
- Analyze data from one year to the next.
- Consider the logical connections between the numbers.
Budget Versus Actual
Budget versus Actual shows the difference between the allocated amount and the budgeted amount, helping you to understand whether you are meeting your targeted goal under a targeted time frame.
The major profit and loss blocks for useful analysis:
- Revenue(Sales)
- Expenses for items sold
- Gross margin or gross profit
- recurring or operational costs
- Other expenses
- Net income
This analysis lets you understand the cause of going over the budgeted amount and helps you find the solution to stay on track and meet your target budgeting goals earning your business profit.
Balance Sheet
While your Budget vs Actual statement helps you to meet your targeted goal by staying under the allocated budget, the Balance sheet is a financial statement summarizing your company’s total assets, liabilities, and equity at specified periods, such as yearly, quarterly, or monthly reports. It shows the company’s assets, liabilities, and source of finance for those assets. The balance sheet represents:
Total assets = Total liabilities + shareholders’ equity
The given formula illustrates that everything a company owns was either bought using loans, investments, paid-in capital, or retained earnings, and profits were reinvested.
“It offers a way to see how efficient and how liquid the company is,” says Cao. “As a lender, we use your balance sheet to see how comfortable we would be in lending money to your company.”
Reviewing the balance sheet helps you understand the debts and assets situation of your business and maintain good relations with creditors.
Cash Flow Statement
The cash flow statement determines the cash inflows and cash outflows under the ongoing operations and external investment sources of the company over a period of time. This statement varies from the balance sheet and income statement as it doesn’t account for any credit transactions. There are three types of cash flow:
- Operating cash flow
- Investing cash flow
- Financing cash flow
The cash flow statement determines which of the following types is generating and spending the most of the company’s finance. This statement also comes in handy for budgeting and decision-making as it can estimate future cash flow. There are a few key areas where you should keep an eye out for patterns and outliers because they can reveal a lot about the state of the company.
- Aim for positive cash flow.
- Regarding positive cash flow, exercise caution.
- Analyze your negative cash flow.
- Make a free cash flow calculation.
- Operating cash flow margin builds trust.
Is It Too Late?
Realistically, most entrepreneurs don’t seem to have a business degree, they never even went to business school. They build an entire empire solely on their tenacity and their knowledge about the market which is enough to run a local-level business but once your business starts to grow it’s going to be mandatory to study your business financial statements on monthly basis. Reviewing statements only during the tax season will leave you clueless about your business. Most of the financial statements are going to be confusing if you started late and you can always use the help of a good accountant who can do the hectic work and make you understand the business’s financial situation.
“You will learn more about Donald Trump by going down to the federal elections, where I filed a 104-page essentially financial statement of sorts, the forms that they have. It shows income – in fact, the income – I just looked today – the income is filed at $694 million for this past year, $694 million. If you would have told me I was going to make that 15 or 20 years ago, I would have been very surprised.”
~Donald Trump, Former President of the USA
