How do you read those monthly financial statements? It’s a question that many business owners ask themselves as they scan the numbers. Now, there are several methods for analyzing your finances and how to interpret them, but we’re going to focus on one of the most common – understanding your balance sheet. In this post, we’ll discuss what it is and how to use it effectively in order to make more informed decisions about your company’s financial health!
The balance sheet is a snapshot of the financial state of your business at a single moment in time. It provides you with an overview of how much money your company has, what assets have been invested into it and where all that money came from. In other words, it shows you exactly what’s going on financially within your business. While many small business owners are familiar with the income statement, they often fail to thoroughly examine their balance sheet.
To read your monthly financial statements successfully you must first be able to identify the components of a typical company’s balance sheet. Here is what it looks like:
Let’s Break Each Section Down So That You Can Understand How To Read It
Assets – This is a summary of all your business’s assets, or everything that has monetary value to you. Assets include cash, accounts receivable (money people have paid you but not yet collected), inventory and equipment used in the operation of your company. From this section we can see how much money your company has, as well as a list of what assets you have invested into your business.
Liabilities – This is the summary of all your company’s liabilities or debts that are owed to creditors. Liabilities include money people owe you for products and services already delivered but not yet paid for (accounts payable), taxes due on the income statement, and money that is owed to creditors.
Owner’s Equity – This section shows how much of the company you own outright without any liabilities attached to it. The equity in your business can be divided into two different types: “invested capital” or what funds have been used towards growing the company (money spent on inventory, payroll and equipment) and “retained earnings” which are the profits left over after all expenses have been accounted for.
We can use balance sheets to compare different months or even years in order to identify trends in your company’s financial health. For example, you might notice that the amount of money owed to creditors has increased or that more inventory is being purchased than sold each month.
One thing to keep in mind when reviewing your balance sheet is how certain line items are calculated can vary depending on what accounting method you use (accrual or cash basis). It is important to understand the differences because your balance sheet might be quite different depending on which method you use.
With All That In Mind, Here Are Some Tips For Reading And Interpreting Your Monthly Financial Statements
Review each section of the balance sheet by line item.
Check off what assets were listed (cash, accounts receivable, inventory) and see if each line item in liabilities matches what you expected (accounts payable).
Make sure that Owner’s Equity is always listed separately from Invested Capital.
Compare the balance sheet to your income statement.
Look for differences between revenue/income generated versus money put back into company assets or invested capital.
Understand how your business calculates its Expenses, especially the Cost of Goods Sold line item. There are a few different ways to calculate this so it is important that you know which method your company uses.
Compare balance sheets from previous months or years in order to identify any trends over time. This can be helpful for both you and future employees who will want an accurate view of how much money the company has.
Key Takeaways
Business owners are familiar with the income statement; they often fail to thoroughly examine their balance sheet. To read your monthly financial statements successfully you must first be able to identify the components of a typical company’s balance sheet. Here is what it looks like: Let’s break each section down so that you can understand how to read the balance sheet.
