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Understand your financials with three reports
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t seems logical that a business owner would have in-depth knowledge of their financial performance, but the reality is that most businesses happen from a dream or hobby and the owners learn by trial and error as they grow. Interpreting and controlling financials is almost a mystery and we see what that means when we get a loan application from a business and their financial statements are riddled with numbers that seem to not make sense. If you are unsure of the value of reviewing your financial statements or understanding what they mean, it’s time to dig in, analyze what’s happening behind the scenes and get down and dirty with your financial statements.
Let’s take a peek at the different statements and why they are important.
INCOME STATEMENT This is also known as a Profit and Loss Statement. At a macro-level, it shows how much you had in sales, what the cost was for the items or services you sold, other business operating expenses and ultimately whether you made a profit. But when you dig into the details, you can find trends – are your sales increasing or decreasing compared to previous months or years? Is your cost of goods sold in line with your industry averages? Do you have any expenses that seem too high or have a negative balance – if so why? This statement reflects a period – whether it be a single month, year to date or full year of income and expenses.
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BALANCE SHEET This statement shows what you own and what you owe. It shows the book value of your assets, if you have cash in the bank, how much money customers owe you (accounts receivable), if you have built equity in the business and the balances of your liabilities such as accounts payable and outstanding loans. This statement reflects a point in time or the balances as of a single date. It is a cumulative view of your business since the beginning.
CASH FLOW STATEMENT This statement shows the impact of incoming cash and outgoing cash and if you have enough to run your business, also known as working capital. Many people think this is the same as the income statement – in some ways it is similar, however, things like depreciation, asset purchases and principal payments on loans that don’t appear on the income statement show where the money has come from and where it has gone. This statement is also a reflection of a period – such as monthly, yearly, etc.