Let me be clear…if you have investments, other than your business, you receive financial statements in the form of quarterly and annual reports, correct? Have you ever taken the time to go through those reports? Oh, you don’t have time? Make time! With a little training and studying you will be able to glean the “oh-so-precious” ratios that dwell within all those numbers deep in those financial statements. Oh those scary numbers! Those tables and terms! I would like to be the light in the darkness. I have a very “big flashlight”. Before I go into the significance of ratios derived from financial statements, how about we take a “fly-by”?
Financial Statements At-A-Glance
Financial statements come in three forms:
- Income Statement
- Balance Sheet
- Statement of Cash Flow
Let’s look at all three financial statements from the perspective of your business. First, the income statement – this statement shows your company’s revenue and expenses over a specific accounting period. These include:
- Net sales
- Cost of goods sold
- Interest payments
- Net profit
- Dividends paid
A company can benefit from generating these statements monthly, quarterly and on an annual basis. This following link will also provide you with a little more detail into the nature of your income statement.
The balance sheet has the characteristic of displaying a “snapshot” of your company’s financial position as of a specific date. The balance sheet is a record of your company’s assets versus liabilities, and this statement shows where your company received the assets and liabilities it holds. Think of assets and liabilities as your company’s resources and obligations. This link is a great resource if you want more information about a balance sheet.
Statement of Cash Flows
Your statement of cash flow is the single best indicator of your company’s health. Hey, you have to be able to pay your company’s bills. If you want to see in one clear statement to show the amount of incoming revenue and outgoing expenses, well then you will have come to the right place. Your statement of cash flows is particularly important in understanding your company for the purposes of attracting investors or your company’s credit decisions. The statement of cash flows reports on cash flows from three different areas of activity within your company.
- Cash Flows from Operating Activities
- Cash Flows from Investing Activities
- Cash Flows from Financial Activities
These activities include positive and negative cash flows. The only revenue-generating cash flow activity of the three is cash flows from operating activities. Why you may ask? For the simple fact cash flows from operating activities represent the money made by your company selling its’ product and/or service. So, it goes without saying that this where your company should be concentrating to generate a majority of positive cash flow.
Cash flows from investing activities represent the cash flow connected to the purchase and sale of land, equipment and buildings. Obviously, the only time in this category your will experience positive cash flow is with the sale of land, equipment and/or buildings. Receiving cash through these activities would not be beneficial to your company in the long-run.
Cash flow generated the financial activities would not necessarily be an undesirable option in generating positive cash flow. These activities would include such things as the company issuing stock or the owner(s) investing in the company. The downside to utilizing this option is that with that inflow of cash comes additional liability – you’re going to owe somebody money.
This is a great link to provide some more insight into the statement of cash flows:
Now that you have all this in your brain, we will next move onto ratios and all the fantastic things that they are able to tell you!Tweet