Last Updated on 2 months by Heyward CPA PLLC
When you first begin your business, it can be challenging to know where to begin. There are so many different things you need to think about, analyze, and understand that it’s easy to get lost in the details. However, one of the most important aspects of creating a successful business is understanding your balance sheet and your cash flow statement. These two documents will give you insight into how well you’re able to manage your company from a financial standpoint. That’s why we’ve put together this quick guide on how to read your income statement and how to understand your balance sheet and cash flow statement for a business. Understanding these three documents will help you understand what kind of impact operating expenses, fixed assets, equity financing, depreciation, and working capital has on your company as a whole.
What is financial analysis?
Financial analysis is when you look at the financial aspects of a business to determine how the business is doing financially. There are a few key indicators you should look at to gauge how healthy a business is. Some of these include the company’s balance sheet, cash flow statement, and/or equity financing ratio. These financial indicators can also be used to forecast what the future financial health of a business may look like. However, it’s important to note that no financial analysis will be 100% accurate. In fact, a business can be doing great financially and still be on the verge of closing its doors because of a change in its industry.
Why do a financial analysis?
Financial analysis is one of the best ways to understand how your business is performing financially. You can use your financial analysis to forecast what your future financial health might look like. There are a few key components that you should look at when conducting a financial analysis. First, you want to take a look at your balance sheet. This document will show you an overview of your assets and liabilities. Next, you want to take a look at your cash flow statement. This will show you how much cash is flowing into and out of your company. Finally, you want to look at your equity financing ratio. This will show you how much equity financing you have compared to your total assets.
When should you do a financial analysis?
You should do a financial analysis on a regular basis as a way to stay on top of your company’s financial standing. While you don’t necessarily have to do a financial analysis every month, you should do one every quarter at a minimum. Doing a financial analysis on a regular basis will allow you to keep an eye on your company’s financial health. If you notice that your company’s assets are decreasing while liabilities are increasing, you may want to look into why this is happening. Doing a financial analysis on a regular basis can help you find any financial issues that you may be having before they get out of hand and have a negative impact on your company.
Balance Sheet Decoded
The balance sheet is one of the most important documents you will create as a business owner. This document can help you to understand your overall financial standing, as well as provide insight into your company’s assets (what you own), liabilities (what you owe), and equity (your investment in the company). On top of that, the balance sheet can also help you forecast your company’s future. The balance sheet will break down your company’s assets into two categories: current assets and fixed assets. Current assets are assets that can be converted to cash within one year. These assets include cash, inventory, accounts receivable, and short-term investments. Fixed assets are assets that are used to generate revenue but can’t be converted to cash within one year. These assets include long-term investments and property. The balance sheet will also break down liabilities into two categories: current liabilities and long-term liabilities. Current liabilities are debts that need to be paid within one year. Long-term liabilities are debts that can’t be paid off within one year.
Income Statement Decoded
The income statement is a document that shows you how much revenue your business has generated over a certain time period. It also breaks down the expenses associated with running the business over that same time period. This document can help you understand your company’s financial standing, as well as provide insight into your company’s operational expenses. On top of that, the income statement can also help you forecast your company’s future. The income statement will break down your company’s revenue into two categories: sales and other operating revenue. Sales are revenue generated from the sale of goods or services. Another operating revenue refers to revenue generated by your company that doesn’t come from the sale of goods or services. This revenue can include things like interest or rent. The income statement will also break down your company’s expenses into two categories: cost of goods sold (COGS) and other operating expenses. COGS refers to the expenses associated with the creation of a product. Other operating expenses refer to the other expenses associated with running the business.
Key Takeaway
The income statement and balance sheet are two key documents you should understand as a business owner. These documents will give you insight into your company’s financial standing, as well as provide you with information about your assets, liabilities, and equity. If you understand these documents, it will be much easier to understand how well your business is doing financially. Whether you’re just getting started or you’re currently running a business, it’s important to understand these documents.
Watch the full episode here: Episode 11-Financial Statements Decoded: Income Statement.