The 3 Financial Statements Business Owners Use to Increase Net Income
A business owners top priority is understanding their financial information. Being able to visualize and process their company’s financial condition is crucial to proper business planning. Without this, the business owner or manager will not have a sound logic to structure business decisions.
In order to gain this financial perspective, most accountant leverage 3 main financial statements: Income Statements, Balance Sheets, and Statements of Cash Flow.
By becoming familiar with the statements, the business owner can gain key financial insights at a glance and become a more effective leader in business decision making.
The income statement, also known as a P&L or profit and loss statement, is a measure of the profit margins for a selected accounting period. By using a full accounting of the entire business’s expenses and revenue, a net loss or profit can be calculated.
This report is the most powerful of the 3 financial statements included here because it give a clear picture of where the business is incurring costs. By adjusting the point in time that is measured, a specific seasonal project or campaign can also be reviewed.
The income statement (also called a profit and loss statement or P&L statement) measures the profitability of your business during a specified accounting period. This statement assesses all of your business’ revenue and expenses, and then reports a net profit or net loss.
Notably, all the costs within the income statement are attached directly to good and services. Knowing this specific indicator, skilled analytics can be used to find efficiencies or inadequacies that may be impacting the bottom line.
It is also critical to understand the income statement within its own context. A single period may include abnormal or inconsistent data. However, creating a series of evaluations to monitor and track changes over time is the most effective way to leverage data from these business financial statements.
A balance sheet is most powerful when used in conjunction with the income statement. Where the income statement is useful for mapping business operating costs and revenue, the balance sheet is a snapshot of the value currently within the company. While this may seem unintuitive, this report is the validation needed to support costs from the income statement.
Contained within the balance sheet is an accounting of the assets the company currently holds. These assets are broken down into 2 categories:
2. Liabilities – These are owned or known debts to the business. This most commonly includes accounts payable, payable liabilities, owner equity, and taxes.
This overview gives clarity on what the business owns, owes, and how much has been invested. By its definition, assets should equal equity plus liability.
The information on the balance sheet is monumentally more valuable when viewed in conjunction with your income statement. For instance, you can use the data from the balance sheet to determine how many investments are required to support the bottom line shown on your income statement.
Cash Flow Statement
Of the primary financial statements, the cash flow statement is very simple. This statement is used to calculate the actual flow of cash through the business. Unlike the income statement, which categorizes each line item, the cash flow statement is concerned with the total amount of moving funds.
This statement is calculated by taking the business starting cash balance, adding cash intake, and subtracting cash expense. The result is the ending cash balance.
The cash intake includes all sales, business loans, and collections. Cash expense is the inverse, including costs, inventory, and expenses. By using this statement, it can be much easier to discover the accounts directly impacting your retained earnings.
By learning how to read financial statements, both individually and as an aggregated report, a business can leverage its own knowledge to improve and adapt. Understanding that financial awareness is more encompassing than accounts payable is the first step to true financial success.
At TransCapital, we can help you understand financial statements and process the best ways to maneuver your loans and expenses to maximize your net income. Contact us today and we can help you build a better financial outlook for your business.