Understanding Financial Statements For Small Businesses
If you’re a small business owner, it’s important to have a good understanding of your company’s financial statements. They’re crucial tools for making wise decisions that will help you grow and expand your business.
The most common financial statements are the Income Statement and Balance Sheet. These two provide a snapshot of your company’s financial health and performance over a given period.
The Income Statement is one of the main financial statements, and it summarizes your business’s revenue minus expenses and gains. This information is shared as quarterly or annual reports, and can help you understand the financial health of your business.
It can also be used by creditors and investors to gauge your company’s future cash flow. This is particularly important if your company is looking to secure loans or take out a new credit line.
The Income Statement also shows the number of shares that a company’s shareholders hold, their earnings per share and the amount of dividends the company pays out if it does pay dividends to its shareholders. Earnings per share, or EPS, is the amount that a company would pay to its shareholders in cash, if it paid out all of its net income as dividends.
A balance sheet is one of the three fundamental financial statements and a foundation for understanding how a company is financed. It shows a snapshot of a business’s total assets, liabilities and shareholders’ equity as of a certain date.
Assets are items a business owns that have a value, such as cash, accounts receivable and inventory. They can be classified as current (able to be converted to cash within a year) or fixed assets (such as real estate, equipment and machinery).
Liabilities are what the business owes to others, such as loans and debts. They are listed on the right side of the balance sheet and can be classified as current or long-term depending on the context.
Owner’s equity is money invested by the owners of a company, usually in the form of stock, plus any retained earnings. It can also include earnings that have been distributed to the owners or shareholders, such as dividends.
Statement of Cash Flows
The Statement of Cash Flows is one of the most important documents to understand, because it focuses on how a company generates and spends cash. Whether you’re an investor, business owner, or employee, knowing how to read this report can help you understand your business’s financial health and long-term stability.
The first section of the statement analyzes a company’s cash flows from its operating activities. The cash flow from operating activities includes cash that a company earns from selling products or services, and any other cash that the business receives from its operating activities.
The second section of the cash flow statement reports investing activities, which include payments that a company makes for assets such as equipment or other property. The third section reports financing activities, which include transactions that alter a company’s equity or debt. These activities typically involve issuing company shares, repurchasing them, paying dividends and borrowing money from a lender.
Statement of Retained Earnings
The Statement of Retained Earnings is a key component of understanding financial statements. It tells you how much profit your company has left over after paying off debts and expenses.
Unlike revenue, which is based on what you sell to customers, retained earnings include any profits that aren’t distributed to shareholders as dividends. This money is often used for reinvestment into the business.
Retained earnings are important to both business owners and investors, as they can help determine the health of a company. They also give outside investors a glimpse into the potential of a company.
Retained earnings are calculated on a periodic basis, meaning that they’re always available for analysis. You can see them on a balance sheet under shareholder’s equity.