Finance Insider: Understand Basic Financial Statements

By Tracey D. Jeffers One component to a successful banking relationship is having a good understanding of your financial statements. Your ability to readily and intelligently answer questions posed by a banking professional gives loan officers a greater comfort level with your financial skills, and bankers like to lend money to people who appear to be on the ball. A full set of financial statements consists of a balance sheet, an income statement (also known as a profit and loss statement) and a cash flow statement. A brief discussion of each follows: Balance sheet The balance sheet provides your lender with a snapshot of the business’ financial health as of a certain date in time. It is the scorecard of what you own (the assets) and what you owe (the liabilities). The difference between the two, hopefully a positive number, is the equity you have built in the firm over the life of the company. That equity number will fluctuate with net income earned each year and any distributions made to owners. Income statement If the balance sheet is your scorecard, the income statement is your report card. The income statement is a report of the financial performance of the company over a certain period of time. It could be monthly, quarterly, annually or anything in between. A good steward of the financial health of the company will closely monitor the income statement on a regular basis. The income statement is a report of gross revenues, the gross margin, operating expenses, other income/expenses, taxes and net income. It is always a good idea to look at your income statement in context with past financial performance or future expectations. You may want to produce income statements that compare performance to the previous year or you may produce income statements that show your progress toward income goals and the management of expenses along the way. Cash flow statement The cash flow statement shows the total amount of cash that flowed into and out of the business over a certain period of time and the amount of cash that flowed out of the business over the same period. Many small firms do not produce cash flow statements, but it is a good management tool to track the cash. If you have an outside CPA firm that produces your financial statements, they can add the production of a cash flow statement to your monthly reports. If you keep your books internally, many software programs, such as QuickBooks, have a cash flow report function. The caution with using the cash flow report available in any software program is that you must be fully utilizing the software and inputting all of the necessary data consistently in order to produce a good, credible, reliable cash flow statement.