Understanding Your Financial Statements

canstockphoto15718027Financial Statements.  Nasty thought, right?  Or at least, that’s the view many business owners seem to take.

Aside from dealing with daily financial issues, many owners neglect the valuable information their financial statements provide — information that can be used to manage their businesses successfully now and optimize their future health.  To understand the current state of your business and plan for the future, you need to understand what your financial statements tell you.  For instance, they:

  • keep an eye on your cash flow requirements and determine any financing needs
  • monitor your business’s financial health
  • identify pitfalls and negative trends in your operations early on so you can avoid a disaster later
  • observe periodic fluctuations in wealth
  • check your actual performance against your financial plan.

Here’s an outline of the 4 basic types of financial statements you need to be aware of, and the kind of information each gives you.

The Income Statement — also referred to as the Profit and Loss Statement. This is a report of earnings, or a statement of incomes and losses. It tells you income earned, costs and     expenses incurred and net profit during the defined accounting period.

The Balance Sheet — here you’ll find your company’s assets, liabilities and owner equity. You can use this as a statement of your company’s relative wealth or financial position.

The “Cash-Flow Statement” — explains how your company spent and earned money.

The Statement of Changes in Owner’s Equity — is used to clarify any discrepancies or changes in the amount of owner’s equity from the beginning of a designated accounting period to its end.

Your financial statements are just the beginning of your financial analysis, and used properly they set off early warnings, giving you the opportunity to act well in advance of impending dangers.