You may often feel caught up in financial statements as a business owner. Juggling multiple balance sheets and income statements to get ideal profits can be challenging. However, you may start experiencing more growth when you learn the analysis process.
Learning how to read and analyze financial statements is profitable. This is because you can easily gauge the profitable resources and drop those that are not. Moreover, planning for future growth is a lot easier if you understand your financial reports.
The following sections will take you through some of the best techniques to understand and analyze your financial statements. These techniques can help you determine how your business is performing.
What are Financial Statements?
Financial statements comprise your company's balance sheets, income statements, and cash flows. Not every successful business owner is an intelligent accountant. It can be hard to understand your reports and develop forecasts for investors. However, with the right guidance, you will quickly understand how to interpret your numbers.
Financial statements are used to analyze how your company performed in the past quarter or year through numerical analysis. It shows you how to increase productivity, utilize resources better, or increase your profits.
It may also show you your current position and if you have missed the mark. This is done through certain formulas, depending on the statement you are reading.
Accountants are great at crunching those numbers to give you that information. However, it is important to understand your financial statements and not just keep them on a back-office file. The following tips may help.
Reading Your Balance Sheet
A balance sheet gives you adequate information regarding the amount you own and what you owe to others. This is the assets and liabilities structure, and it is what your business depends on the most. Your assets can comprise your capital, cash flows, or accounts receivable. These can fluctuate depending on your liabilities (including debt or payables).
The balance sheet also contains your equity, the amount of money you have invested in the business. This is made up of the following;
- Capital: The investment made by the founders or investors. This should match your cap table.
- Retained Earnings: The amount your business currently holds.
- Drawing/distributions/dividends: How much do you draw from your own business or distribute to your shareholder?
Reading Your Income Statement
An income statement, also called the profit and loss statement, will speak volumes about how much your company has earned (revenue) and lost (losses and expenses). This is usually analyzed monthly.
When going through your income statement, take some time to understand the following;
- Revenue: This is the amount your business has made throughout the year and can also be described as earnings.
- Expenses: This is the amount your business will spend or has spent over the past month, year or quarter.
- Cost of Goods Sold: It signifies the cost of individual parts that make up the product sold by the business.
- Gross Profit: Unlike the revenue, this is the profit the business has earned, which is calculated by subtracting the cost of goods sold from the revenue. This is an important key indicator for your business and one that your investors will often ask for.
- Operating Income: This considers the company's operating expenses and is determined after subtracting operating expenses from the gross profit.
- Depreciation: The value depreciation that is applicable to your product will also be accounted for in this statement.
The factors listed above will determine the growth of your business over time. How you use your income statement to target future growth can change the losses of the past year.
Professional accountants usually view income statements as they have the expertise and the eye to catch discrepancies. They can also analyze your statements and help you understand where there is room for improvement.
As you go through the statement, ask yourself the following questions;
- Is my product or service profitable?
- Is the amount of money I spend on making the product or service worth it?
- Do I spend far more than I make?
Reading Your Cash Flows
The cash flow statement is an essential part of your overall financial report. This can help you understand how the business' cash has been used over the past month, year or quarter. These cash flows can determine how a business operates.
Cash flow can be received from a business' daily operations or return from investments. Cash flow is much more variable than profit. Remember that a cash flow simply tells you how much cash flows in and out of the company. This differs from the profit, which shows how much a company has accumulated in revenue minus the expenses.
Why are Financial Statements Important?
Financial statements can help you understand your company's performance much better. It helps you analyze your ongoing expenses, how much debt you have accumulated, and the amount you need to repay.
Statements are also vital if you want to analyze how your company is currently performing versus future performance and the factors that can affect it. Financial statements determine how much your business can grow, as the analysis will allow you to create accurate forecasts and tweak current performance.
If you are a startup looking to grow, accurate financials are crucial to present to current and future investors and to make the right data-driven decisions for your startup.
Final Thoughts
Your financial statement is the most critical tool. It can help you analyze how your company is doing. Most businesses want to perform an accurate analysis that captures a clear picture of current financial growth. For this, relying on an experienced financial expert for your company’s accounting data is essential.
This expert can dedicate their time to understanding your business model. This observation is used to align financial records with your goals and support focused business growth.
Experienced accountants or financial analysts are qualified enough to conduct financial analyses. That is how they produce accurate yearly financials.
Financial analysis includes KPIs, budgets, and forecasts that will help you keep up with your broad yearly goals. This analysis can also involve cloud accounting and other accounting tools, accurate bookkeeping, and data analysis to reach the right conclusions.
Cypher’s experienced accountants don’t just offer accurate financial reports but also assistance throughout the year to keep finances in line. This helps you create better and more accurate reports at the end of the year. You can utilize a financial expert’s advice to hit your targets accurately and efficiently.
