When evaluating the health and wellness of your business, it is important to remember the various elements that can best help you do this. Ask yourself questions such as “how much is my business spending? What is our total revenue? What does our current financial situation look like? What aspects of our business can we improve upon?” In this post, we will explain the 3 basic financial statements and how understanding them can help you prioritize your business’ health. For a clear image of what these statements look like, check out this diagram.
The Income Statement
The income statement, also known as P&L (Profit & Loss), reveals how well or poorly a business is performing during a certain period. It shows the total sales revenue at the very top of the statement and then deducts the cost of goods sold to find total, gross profit. After this, the net income is found by deducting other expenses and operating incomes from the gross profit: this is “the bottom line” for the business. In other words, it starts at the top with revenue and breaks down all the flows in and out of money that the company had during a certain period of time, leaving the company’s profit as a result. This is important for organizations of all sizes, and even personal finances, because it shows whether they are making a profit or have a loss during a determined period of time, and red flags can be identified.
The key features of an income statement are:
- Shows revenues and expenses of the business (i.e. how much money is entering and leaving the business) over a fixed period of time (i.e. year, quarter, etc.).
- Can help you assess profitability of your business.
The Balance Sheet
It can be said that the income statement is a movie of the company for a period of time (e.g. how money moved in and out during a one year period), while the balance sheet is a picture of the company taken in a determined time (e.g. how the company is by the end of the year). The balance sheet enables you to see your business’ assets, liabilities, and shareholders’ equity. The asset section displays cash and equivalents, which should be equal to the balance sheet seen at the end of the cash flow statement. The sheet then shows the change in balance in each major account to finally reveal the total net income from the income statement flows. This is important for organizations because it allows any stakeholder to understand what is the financial position of the company and enables them to project what its position will be into the future, because it is here where a company can see what it owns and what it owes.
The key features of a balance sheet are:
- Liabilities + Shareholders Equity = Assets (these are the three main sections of the balance sheet).
- Shows the financial position and status of a business.