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Discover how to use financial statements to grow your business.
In every episode of House, ER, and Doogie Howser, M.D., doctors check the charts, review the results, and carefully analyze the patient’s health. The same principle applies to the financial health of your business. CFOs decipher the financial statements to understand the business's economic well-being, which helps business owners determine the next steps.
Keep your finger on the pulse of your business with this high-level guide to balance sheets, income statements, and cash flow statements.
It starts with your balance sheet, a snapshot of a company's financial position at a specific moment. It provides a quick overview of what a company owns, owes, and the net value it offers its shareholders.
The balance sheet is split into three parts: assets, liabilities, and shareholders' equity, which all contribute to a company’s financial position.
For more details on understanding how balance sheets can impact your business decisions, check out our guide on why is my balance sheet not balancing.
As the name suggests, the income statement (AKA profit and loss statement or P&L) is a summary of a company’s financial transactions over a specific time (such as a month or a year), providing a linear view of a company’s transactional activities, and how revenue becomes net income.
The bottom line of net income or losses holds significant value for stakeholders, accountants, investors, and business professionals. It is literally the flat-line moment for accounting.
Revenue is at the top of the income statement and represents all income (operating and non-operating) flowing into a business. Learn more about interpreting income statements in our guide on how to read and use an income statement.
Expenses are the costs incurred by a company, including the cost of goods sold (COGS), operating expenses, and non-operating expenses. Understanding these fixed and variable costs is vital for strategic financial planning and managing profitability.
Watching your bottom line is critical; however, it is equally important to understand your organization's cash utilization, debt, equity, and dividends. This is done via your cash flow statement; a micro-view of your company’s liquidity that tracks cash inflows and outflows from:
Operating cash flow activities reflect the cash generated by a company’s core business activities, such as sales revenue, accounts receivable, inventory, accounts payable, and operating expenses. Learn more about cash flow management in our article on small business cash flow management.
Investing activities involve the buying and selling of long-term assets and investment securities, which can have significant impacts on a company’s financial health. Check out our guide on the ins and outs of small business cash flow.
Financing activities reveal net cash flows used to fund the company, involving transactions with debt, equity, and dividends.
For a deeper understanding of cash flow reports, see understanding cash flow reports.
The retained earnings statement shows the income accumulated and kept in the company since its inception. It provides insight into the attitude toward reinvesting in and growing the business versus the cash funneled into dividends. This statement is invaluable to prospective investors if you are considering a merger or acquisition.
Just like Dr. House's list of medical tests: "CBC, Chem7, and a Lipids-STAT," financial statements should be viewed together. They are all intricately linked, and understanding these interconnections provides a more comprehensive view of a company’s financial position and performance.
Mistakes or inconsistencies can lead to unreliable financial statements, stakeholder concerns, taxation issues, and legal problems. Accounting principles guarantee financial statements are comparable, reliable, and transparent. Leverage the experience of your accounting team to complete all the checks and balances. Alternatively, reach out to a Kordis team member for assistance.
Assessing financial health goes beyond reports full of numbers. It requires a thorough examination of:
An experienced accountant or CFO will look at every facet of your business. More so, a financial advocate will thoroughly explain your company's financial health through easy-to-read reports.
Just like your regular fitness checks, assessing a company’s financial health is not a one-time task, but a continual process of analysis and understanding. For more help with your financial checkup, contact a Kordis expert today.