What are Financial Statements?

 Written by the Controller | CFO Advisor Team

More importantly, what do these financial statements mean to my business today, tomorrow and in the long term?  The astute business owner needs to understand and be able to interpret exactly what they have.  Every business owner should receive, at the very least, basic financial statements that provide the current results of the business.  These statements are summaries of the events that have taken place in the period being reviewed.

The primary reports generated are the Balance Sheet, Income Statement and Cash Flow Statement.  Other reports are merely selected or highlighted data that take a deeper look at these results.

The Balance Sheet can help respond to the following questions.  How long can my business ride out the storm of a sales downturn?  How do I know if my business is trending toward failure?  Are there other factors that will cause my business to fail?  Important questions a small business owner thinks about (or more likely loses sleep over) on an on-going basis.  A company can track the movement of yesterday’s cash on their Cash Flow Statement but to truly understand what tomorrow’s cash flow will look like, a careful eye must review the Balance Sheet.  The Balance Sheet represents a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets.  It is a summary of the all the transactions that affect the business.  Therefore the Income Statement and the Cash Flow Statement are linked to this statement.  Businesses can withstand severe declines in sales if its Balance Sheet is strong.  Equally important is the accuracy of these accounts.  If inventory is primarily made up of slow moving or obsolete inventory it will be difficult to turn this quickly into cash.  The worse part of this situation is that the business owner may not even realize these weaknesses exist in the financial statements he reviews each month.

The Income Statement (also sometimes referred to as the Profit and Loss Statement) is the most often viewed statement by the small business owner.  It tells us what we have left from our revenue (sales) after deducting all the company expenses and costs over a period of time.  When reviewing your results it is helpful to show both dollars and percentages to the top line revenue.  The P&L Statement tracks only revenue and expenses.  It is broken down into categories and subtotaled several times before we get to the net income figure.

If a business owner has limited resources for obtaining or borrowing money quickly the Cash Flow (CF) statement shows cash inflows and outflows for a specific period of time.  It tells you how much cash you had at the beginning of the month and how much you had at the end of the month.  It summarizes how much cash you collected and how much you paid out.  Its main purpose is to emphasize the critical nature of cash flow to the operation of the company. The Cash Flow statement can also be used as a key forecasting tool.  The pro forma cash flow statement serves as an early warning system to alert the company when a cash-flow problem may be coming.

A key responsibility the small business must not neglect is working capital management. Working capital is defined as the amount of current assets minus the amount of current liabilities as of a specific date.  The small business owner must allocate funds between current and fixed assets and obtain the best mix of financing alternatives. Available financing is not limitless and proper decisions must be made with an eye for future needs.  The most appropriate financing pattern would be one in which asset buildup and the length of financing terms is perfectly matched.  For example a short-term operating line of credit for inventory or a 10 year term loan or lease for large equipment purchases.

Do you have too much information or not enough? In the tech age computers can spew out reams of paper detailing every event… but is it useful? A business owner should develop the metrics that best define its operations. They should not be overly complicated and must be easily understood. The metric should also be reported timely and be shared by all staff that has an influence on the end result of the business operations. 

BIK’s outsourced Controller|CFO Advisors can review your company’s financial reports, to help determine whether any changes should be made, to provide the information you need to help manage the operations of your business.

The BIK Controller|CFO Advisors:

Tony Battaglia
Tim Beck
Al Knox
Larry Schmitt

Together we can perform a variety of accounting and financial services to help your business run more efficiently and economically.  Our objective will be to improve your bottom line through better processes and procedures. Contact us today at cfoservices@bikcpa.com or call 847-281-3209. 

Visit our web-site at www.bikcfoservices.com.