How to Read Your Financial Statements

Morgan Blogs Part 2

And what the info says about the health of your business

Financial statements are reports that summarize important financial information about your business.

But if you’re not a numbers person, muddling your way through these can be cumbersome or even downright frustrating.

Good thing you know a CPA firm that wants to help.

Three of the most important documents are your balance sheet, your income statement, and your cash flow statement. We’ll cover each of these below.

How to read a balance sheet

A balance sheet is a snapshot of your business finances as they currently stand.

It tells you about the assets and liabilities that you own and owe.

The value of the assets section will always balance with the liabilities and equity section. Hence the name.

It’s like getting a quick look at where your money lies — whether in liquid cash (income) and equipment you own, or in liabilities (like mortgages, loans or wages owed to employees).

Some big businesses get balance sheet updates daily. Small businesses might see one every 3 months.

Equity is the remaining value of the company after subtracting your liabilities from your assets.

It can be in the form of common stock (like stock you buy and own shares of) or in retained earnings, which is the net income you retain after paying out dividends to shareholders.

How to read an income statement

An income statement lets you see how much money you’ve spent and earned in a specific period.

That lets you calculate your net profit (or bottom line).

Sections of this statement include revenue, cost of goods sold, gross profit, operating expenses (like utilities and rent), operating income or loss, taxes and other non-operating expenses.

Your net income is what you walk away from once you subtract all of your expenses.

This is the key document for many business owners.

It is super useful because it helps you see exactly where you are spending your money.

For example: Even if you had a great gross profit number (total revenue minus your cost of goods sold), but your rent is too high, your income statement will show you that.

How to read a cash flow statement

This one tells you how much cash entered and left your business in a certain time period.

This is the cash reality of your business.

Depending on the type of accounting system you use, you might have some discrepancies between your income statement and your cash flow statement.

Reasons for that are because income might not arrive in a certain month, or money that hasn’t been paid out yet will also be shown.

Total cash from investing activities is also included — like money withdrawn to pay loans, or what an owner might withdraw to pay themselves.

If you’re already a bookkeeping pro, you already know how valuable these financial documents are for a snapshot of your business.

If you need help setting up these financial statements for your business, let the experts at Morgan & Associates help you get started. Give us a call today!

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