Your Business Financial Statements:
What You Need to Know!

Author: Larry Chester, President

Often, I meet with business owners that are embarrassed that they don’t understand the basics of Finance. If you don’t understand the differences between the financial statements you’re given, how can you use that information to help grow your business?

So, here’s a little refresher course on the three Financial Statements, Balance Sheet, Income Statement and Statement of Cash Flows. They each tell you different things about your business.

The Balance Sheet tells you the status of your business at a point in time.
The Income Statement tells you how your business did over a period of time.
The Statement of Cash Flows tells you how you used money and where it came from.

Here are some quick ideas about what to look at when you see these statements monthly:

• Balance Sheet – The presentation of Assets and Liabilities of your company. These numbers tell you about the strength of your company. Not just what money you have, but what you own, what you owe and what others owe you. Review these numbers and note how they’ve changed from last month. Various ratios allow a quick way of measuring your company. Tracking that month to month tells you whether you are making progress, and how quickly.
• Income Statement – Your P&L, Profit and Loss. A statement of your sales and expenses. It is the review of this statement and the detail behind it that tells you whether you made money and where you made it. Subsidiary schedules give you the detail that makes up these numbers. It is an analysis of these numbers that allows you to make changes in your business today that will affect your profitability tomorrow.
• Statement of Cash Flows – Your company’s sources and uses of cash over the period. Did you make or use more money this past month? Where did the money you spent come from? Did you borrow the money, or sell more inventory? Since cash is what drives any business forward, how you used your money this past month is important in your planning.

These three statements tell you the basics, the summary of what your business has done over that past period – whether a month, quarter or the year. But it is the detail behind those numbers that will tell you what you need to do to grow your business. It is the subsidiary schedules of Inventory, Sales by Product, Margins by Product Group, Prepaids and Accruals, Operating Expenses and how they break down into Operating costs and Cost of Goods sold.

Every client we’ve worked with has specially designed subsidiary reports that help the owner focus on the aspects of his business that are most important to him, his customers and his profitability. If you’re just looking at those three basic statements, you’re missing the detail that allows you to drive your business forward. It’s an old cliché, but very true. The devil is in the details. Without the details, you won’t know what to fix, or whether difficulties in your business might be masked by the success of a particular product line or customer sale.

A proven CFO can help you analyze these statements and help you do the planning that you need.