What Can I Learn From My Company's Financial Statements?
For some business owners, financial statements are a formality, required by governing bodies like the Internal Revenue Service (IRS). And many small business owners may feel overwhelmed by financial statements and unsure of what to make of them, not having the time to dive deep into the details. After all, if the company is profitable, everything is going well—right? Not so fast.
Your company’s financial statements provide metrics to measure your company’s overall financial health. When you break down financial statements, you can begin to explore the productivity and efficiency of your company’s operations.
Financial statements give you and your team insights into which facets and departments of your business are helping you reach your financial goals, and which need improvement. Below, we have outlined how to analyze financial statements to better understand how your organization is currently performing.
Balance Sheets
Balance sheets provide business owners with information regarding their assets, liabilities, and shareholder equity. Assets can include physical objects and equipment required to keep the business, as well as intangibles such as trademarks, patents, and investments. Liabilities, on the other hand, show how much a company owes to other parties, such as vendors, lenders, landlords, banks, and government entities. Shareholder’s equity refers to the projected value of a company after all assets are sold and all liabilities are paid.
The formula of a balance sheet, also known as an accounting equation, is Assets = Liabilities + Shareholder Equity. The purpose of a balance sheet is to provide business owners with insight into how these elements are currently positioned against one another, and whether your liabilities are negatively impacting your short-term financial growth.
Income Statements
Income statements are more straightforward documents than balance sheets, as they report on net income, generated revenue, and operating expenses. Net Income = Revenue – Operating Costs. Income statements teach business owners the current relationship between financial growth and the cost of doing business.
The net income provided by an income statement shows businesses which expenses associated with their business are impacting their overall profits. Income statements are essential for business owners to discover what aspects of their business are contributing to smaller profit margins than expected.
Financial Ratios
Financial statements can provide business owners, as well as investors, with a series of financial ratios that help illustrate the overall financial health of the organization. Useful ratios found within financial statements include:
Current ratio. This ratio is determined by the formula Current Assets ÷ Current Liabilities. The current ratio helps business owners and shareholders understand a business’s ability to use short-term assets to cover short-term liabilities.
Efficiency ratio. Like the balance sheet, this ratio helps business owners see how well their organization is managing its overall assets and liabilities.
Debt ratio. This ratio is useful for expressing a business’ current ability to manage its debt.
Valuation ratio. This ratio communicates a business’ current perceived value in the market.
Cash Flow Statements
Cash flow statements reveal how much money has cycled through a business over a set period. These statements consider the cash inflow that a business needs to pay its debt and fund its operations, revealing how the money is being generated and how it is being used.
Cash flow statements teach business owners how well equipped their organization currently is at generating cash and fulfilling its financial obligations. Investors tend to look at cash flow statements to determine whether a business is managing its finances effectively and responsibly.
Third-Party Reviews
This blog only scratches the surface of what financial statements can reveal about a business. Financial statements are typically comprehensive and exhaustive and may require the insight of an accountant or financial advisor.
While financial statements can teach business owners a lot about the current financial health of their organization, they do not always offer a clear path forward. Small business owners often feel as though they lack the tools and resources to turn their financial situation around if their financial statements reveal a stark picture of their organization’s future.
At Sebastian Lane Consulting, we can offer not only expert analysis of your financial statements but also your business’ sales process and management. We can help you and your team better understand what needs to be accomplished to cut expenses while building revenue and increasing profit.
Get in touch with our team today to learn more about how we can help leverage your existing resources to help you and your business better meet your financial goals and strategize for the future.
If you have questions about your financial statements, call Sebastian Lane Consulting at 443-534-6783 or email us at jesse@sebastianlaneconsulting.com to schedule your free consultation.