To give you an idea of the overall financial health of your business, it all stems from the analysis of the four basic financial statements, and for that reason alone it’s important to understand them. From a financial management perspective, combing through the financial statements can offer some valuable information. Today, we at Mark Dicus & Company would like to elaborate briefly on the basic financial statements.
Financial Planning with Balance Sheet
The difference between your assets and liabilities is equity. The balance sheet shows a company’s assets, or what you own, as well as the liabilities, or what you owe. Essentially, the balance account shows how efficiently you are putting your business resources to work. Important for managing debt, the balance sheet provides a snapshot of your financial position at one moment in time, and allows you to figure out your solvency versus liquidity ratios. The balance sheet also helps you understand whether you can acquire capital, distribute dividends, or even just pay your bills. As a crucial and underrated aspect of financial management, a thorough understanding of your balance sheet allows for better budgeting. For various managers, you can have an accurate budget, and a business can plan operations, coordinate activities, and better communicate.
Income Statement Aid in Business Financial Plan
Your income statement, also known as a profit and loss (P&L) statement; shows revenues, expenses, and profit/loss over a given period of time. In terms of getting tests at the doctor’s office is how you can view the relationship between the income statement and balance sheet. For just one moment in time your balance sheet shows data points. You can pinpoint what aspects of your operation are correlated with high-growth periods and what aspects lead to stagnation by analyzing your income statement. This helps you identify which aspects of your business are in need of support and should receive more money. With a clear idea of how certain initiatives translate into earnings income statement analysis of this kind can also help with forecasting and assessing risk. When you expect to be, if ever investors and lenders will also want to know if you are profitable.
Cash Flow Statement Financial Planning
The cash moving in and out of your business is summarized in the statement of cash flows. There is a key difference with the income statement; the revenue the income statement lists might not have been paid yet for companies that use accrual accounting. To help you determine how much cash you can devote to growing your business, and whether you have a sustainable cash outflow, understanding the statements plays a significant role. Cash is still king and must be accounted for while there are a million and one financial tricks you can play to keep a business running. You can take swift action if you see a large discrepancy between your revenues and your cash flow.
Retained Earnings Financial Statements
The changes in equity over a given period is what the statement of retained earnings tracks. Once you’ve paid out dividends to stockholders, your retained earnings are equal to the amount of net income left over. Whether your business profits went up or down over the period is shown in the statements. Though not as rigorously tracked as the previous three statements, this statement especially needs to be prepared when a business is fundraising. An accurate depiction is asked upon by investors. To generate high returns to shareholders, they also need to know what activities you are undertaking.