Scoot over financial health tunnel vision. You can learn how your business is doing holistically by preparing different financial statements. So, what is a financial statement?
What is a financial statement?
A financial statement is a collection of your business’s financial information. Use statements to organize and analyze information to form conclusions about your business’s financial health. Statements include line-by-line items as well as total amounts of what you’re looking at. There are three main financial statements: income statement, balance sheet, and cash flow statement.
Each type of financial statement reports varying information during a period (e.g., month, quarter, etc.). Using statements gives you insight into several areas of your business’s financial health.
Here’s the breakdown of what each major financial statement reveals:
Income statement: Your business’s profits and losses Balance sheet: Your business’s assets, liabilities, and equity Cash flow statement: Your business’s incoming and outgoing money
Read on to learn more about income statements, balance sheets, and cash flow statements. Find out each statement’s purpose, financial statement parts, and formulas.
An income statement, or profit and loss (P&L) statement, is a summary of your business’s profits and losses during a period. You can prepare the statement monthly, quarterly, or annually. Once you decide on your time frame, break down your business’s revenue and expenses on the statement.
An income statement shows how well your company is doing over time. It measures the profitability of your business.
Look for the bottom line on an income statement to see whether you have a net profit or net loss. This represents whether your business’s net earnings were positive or negative during the period.
Use the following formula to find your business’s net profit (or net loss) and help you know where to pull information from for your income statement:
Net Profit = (Revenue – COGS) – Expenses
Keep in mind that the income statement doesn’t show overall financial health, money you owe or owed to you, or assets and liabilities.
Parts of the income statement
If you want to know how to write a financial statement, take a look at the parts of the income statement:
Revenue Cost of goods sold (COGS) Gross profit Operating expenses Total expenses Net income before taxes Income taxes Interest Net profit or net loss
Although they can differ, here’s an example of an income statement:
How to use the income statement
There are a number of ways to use your income statement to make business decisions, including:
Products: You can see which sales items are the most and least profitable. Also, look for any expenses you could reduce or eliminate.
Budget: Use the income statement to find out if you are over or under your business budget. The statement shows how much cash you have left over after expenses. You can use the leftover cash to expand your business, pay yourself and other owners, and pay debt. If you do not have leftover cash, look for ways to adjust your budget.
Financing: Investors, lenders, and vendors often want to look at your business’s income statement. These individuals assess the level of risk involved in working with your company.
The balance sheet summarizes your financial health on a specific date. It shows you what you own and owe by breakingContinue reading