Financial statements are essential tools for evaluating a company’s financial health and performance. They provide information on a company’s assets, liabilities, revenue, expenses, and cash flow. As a non-finance professional, it’s essential to understand the basics of financial statements and how to use them to make informed decisions in business. This article will examine the three primary financial statements: the balance sheet, income statement, and cash flow statement.
Balance Sheet
The balance sheet provides a snapshot of a company’s financial position at a specific time. It shows the company’s assets, liabilities, and equity. Assets are what a company owns and can include things like cash, property, and equipment. Liabilities are what a company owes and can consist of things like loans and accounts payable. Finally, equity represents what is left over after subtracting liabilities from assets, including retained earnings and stock.
Suppose you are a non-finance professional considering investing in a startup company. Review the company’s balance sheet and see that it has $50,000 in cash, $100,000 in property and equipment, and $25,000 in accounts payable. You also see that the company has $75,000 in stockholder’s equity. This information shows that the company has more assets than liabilities, which is a good sign. You can also see that the company has a healthy amount of cash, property, and equipment.
Income Statement
The income statement, also known as the profit and loss statement, shows a company’s revenue and expenses over a specified period, usually a quarter or a year. It shows how much revenue a company generated and how much it spent during that time. The company’s net income or net loss is the difference between revenue and expenses.
Suppose you are a small business owner and want to review your company’s financial performance for the last quarter. You pull up your income statement and see that your company had $50,000 in revenue and $35,000 in quarterly expenses. This means your company had a net income of $15,000 for the quarter. You can use this information to evaluate your company’s financial performance and decide on future investments or expenses.
Cash Flow Statement
The cash flow statement shows the inflows and outflows of cash over a specified period, usually a quarter or a year. It shows how much money a company generated and how much it spent during that time. The difference between cash inflows and outflows is the company’s net cash flow.
Imagine that you are a project manager working on a construction project. You must ensure enough cash to pay for materials, labor, and other expenses. Review the project’s cash flow statement and see that you have $100,000 in cash inflows and $75,000 in cash outflows for the month. This means your project had a monthly net cash flow of $25,000. You can use this information to decide when to pay vendors and suppliers to ensure that you have enough cash available when you need it.
Interpreting Financial Statements
Now that we understand the basics of the three primary financial statements let’s take a closer look at how they relate to each other. The retained earnings account connects the income statement and balance sheet. Retained earnings represent the cumulative earnings of a company that have not been distributed as dividends. The balance sheet and the cash flow statement are connected through changes in the cash account. Any changes in cash on the balance sheet will also be reflected on the cash flow statement.
It’s important to note that financial statements alone do not provide a complete picture of a company’s financial health. Market trends, competition, and management decisions can also impact a company’s performance. Therefore, it’s crucial to interpret financial statements in the context of these other factors.
Additionally, financial statements can be complicated to understand, especially for non-finance professionals. However, there are tools and resources available to help. For example, financial software and apps can provide easy-to-read financial statements and visual representations of financial data. In addition, professional development courses or workshops can help non-finance professionals build their financial literacy skills.
Financial statements are essential tools for evaluating a company’s financial health and performance. By understanding the basics of the balance sheet, income statement, and cash flow statement, non-finance professionals can make informed decisions in business. In addition, interpreting financial statements in the context of other factors and using available tools and resources can also help non-finance professionals build their financial literacy skills and make more confident decisions.
HJK
