Learning to Love your Financial Statements
How to review your financial statements and make empowered decisions.
In these uncertain times, whether you’re a solopreneur, entrepreneur, or a seasoned CEO, managing your company’s finances becomes ever more vital to the health of your business. Financial management can feel very complex, but here is one easy way to start. Begin with learning to love your financial statements!
Easily overlooked, these key reports are the best tools to manage and monitor your business performance. Still not convinced? Let’s walk through a few basics on how to read, understand, and analyze your financial statements and get you started on a path to empowered decisions making.
What are the financial statements?
If you are like most entrepreneurs, you might find financials intimidating. But hang in there. Once understood, they can become a motivating factor for you and your team. Yes, really!
Like when dealing with so many new things, pushing aside negative self-talk and reminding yourself that you are in control is the first place to start.
There are three main financial statements: the income statement, the balance sheet, and the cash flow statement. Each statement represents a different point of reference for a business’ activities. Ratios connect the dots between each of the statements and are often used as measurable points when evaluating a company’s performance. Financial statements are always presented in a structured manner, so once you’ve mastered the format, you will be able to review financials over and again.
The financial statements at a glance:
The income statement contains the results of an organization’s operations during a specific period of time. It shows revenues and expenses and the resulting profit or loss.
The balance sheet describes what a business owns, what it owes, and what is left over for its shareholders on a particular date in time.
The statement of cash flow is used to identify the balance of cash for a business over a specific period in time, as well as its sources and uses.
Ratios analyze a company’s financial condition. They are often compared against previous periods in time, or against other companies in the same industry.
What should I be reviewing exactly?
To understand your company’s financials, you need to understand the BIG PICTURE: what are your company’s vision and financial objectives? As entrepreneur and owner, aligning your vision and strategy with financial results is a key step that will lead to empowered decision-making. So, how do you get there?
First, learn the layout of the financials. This begins with the company name, the statement being presented, and the timeframe of the statements. These are all important details to notice.
Next, it is important to understand what assumptions have been made to prepare the financials. Yes, assumptions. Because assumptions are so prevalent in financials that a whole body of generally accepted accounting principles referred to as GAAP has evolved to allow owners and investors to rely on the information presented. For your part, understand that financials are built on data and knowing how the data was compiled is an important place to start.
Lastly, you will need to learn how to analyze financial statement trends. This is where the fun begins. Knowing your numbers, both in total and in relation to others, is where your full decision-making ability will emerge.
But how can financial statements help empower decisions?
Once you understand your company’s financial statements, you can begin to track specific items that impact your organization’s bottom line. Additionally, you can track key metrics and balances that will help you avoid the pitfalls many startups and emerging businesses make, especially around managing cash.
Understanding your statements will allow you to:
Realize the role money plays in every business decision
Determine if you are making a profit or losing money
Calculate your current and future financial needs
Being financially savvy is a learned skill, and over time, you will be able to analyze key trends quickly and confidently. Not only will knowing how to read these numbers help you make empowered decisions, but it will also help you plan for growth, check in with your team, and set yourself up for success! Learning to love your financials, it is easier than you think!
Regular financial review provides vital information to help manage your business’ performance. If you are looking for help preparing or reviewing your financial statements, or you want to run some questions by us, reach out at info@thielstyle.com. We would love to help guide you through the process.