Business Owners & Reading Financial Statements

In many companies, it is the CPA who performs the analysis of the financial statements. After all, as an accountant, the CPA has expertise in interpreting and drawing conclusions based on financial statements. However, business owners can reap great benefit from learning to read and understand financial statements. The information those statements contain reflects the overall health of the company. When the business owner can identify problematic indicators in the financial statements, he or she can take immediate corrective action.

There are three core financial statements, and each one depicts a different view of the company’s overall financial picture. The balance sheet, the income statement, and the cash flow statement provide three different snapshots of the company’s financial health at a specific point in time such as month end, quarter end, or year end.

The balance sheet provides and overview of the company’s financial position. It measures assets -- what the company owns -- and liabilities -- what the company owes, at a given moment in time.

The income statement reports the profitability of a company for a stated period of time such as a month or year It compares the revenues generated with the expenses incurred to produce those revenues. In other words, it shows the amount of money made through sales, minus what it cost to produce whatever is being sold.

The cash flow statement captures cash fluctuations for a company, at various points in time.  It lists all sources and uses of cash. More importantly, it can be used to gauge how much cash is on hand so that a company can determine if it can pay expenses and purchase assets.

Business owners who are able to read and understand their financial statements develop insights into the overall health of their companies. That additional information allows them to  confidently make decisions on how to move their business forward, often with a competitive edge that others lack.