Financial Statements Interpreting the Numbers
Understanding Your Financial Statements Can Be Overwhelming.
If you’re running a small business, you need to have accurate financial statements and a good understanding of what they mean. Financial statements can be incredibly overwhelming for some business owners. Luckily, at Harvest Tax & Accounting, we can tackle them with ease. Plus, we take the time to review the most important aspects of those reports to make sure you’re comfortable with where your business stands financially.
Your financial statements are the best way to gauge your business’ health and profitability. These are the three reports you can expect to receive from us each month:
Profit & Loss Statement (P&L), aka Income Statement
The basic formula for this statement is Net Income = (Revenue + Gains) – (Expenses + Losses)
This report, quite simply, shows how profitable your business has been in the last month and for the entire year. It keeps a running tally of your business’ revenue and expenses.
Your P&L statement can tell you a bigger story, and we can help you comprehend that story. For instance, we might notice that you’re spending more on contract labor than other people in your industry. Or, maybe your cost of goods looks a bit high. We might even notice that you should be paying yourself more than you already are. Everyone’s P&L is different, but we can offer guidance on how to use that data to improve your business.
Cash Flow Statement
While your P&L statement tells you how much profit you made, the cash flow statement shows how well your company is using its cash flow to generate revenue and to cover its operating expenses.
There are three different types of activities covered in a cash flow statement:
Operating Activities. The normal, day-to-day activities involved in running a business – such as bringing in revenue or paying employees.
Investing Activities. This covers any expenses associated with long-term investments, such as property, equipment, etc.
Financing Activities. These types of activities include loan proceeds, repayments of principal, and owner transactions
Of the three statements, this is the one that will tell you how financially healthy your business is at that moment.
The basic formula for the balance sheet is simple:
Asset = Liabilities + Equity
In other words, the balance sheet shows a snapshot of your total assets and subtracts any liabilities (credit card balances, loans, etc.). to arrive at your equity in the business.