“I have no idea what all these numbers mean.”
This is one of the most common things I hear from clients when they first start working with me as their fractional CFO.
And while we may be fearful of confronting the complexities in our numbers, it’s crucial that we do. You might not be the one to prepare financial statements, but you do need to know how to read them and understand the story behind them.
How else will leaders, employees, and stakeholders understand the true story behind their company’s financial wellbeing?
Let’s take a closer look at the financial statements you need to know to bring your A-game to your business.
Business Financial Statements
Profit & Loss (P&L) / Income Statement
The profit & loss statement is commonly referred to as an income statement – and for good reason. You’ll refer to your P&L to understand revenue, costs, and expenses.
This is the most important financial statement in your arsenal for understanding your bottom line. When you’re considering getting a business loan or seeking out investment, the P&L will demonstrate to outside parties the exact amount of money made or lost within any given timeframe.
Now, here’s something to consider. There are two methods for measuring revenue – accrual and cash basis. The main difference is in the timing of when an accountant chooses to recognize revenue and expenses. With accrual accounting, you’ll record transactions when money is earned or spent, in anticipation that it will be received or paid. With cash basis, you’ll only record revenue when actual money has been received and expenses when they’ve been paid. So, depending on which you use, the P&L may reflect different numbers.
Your balance sheet indicates the financial health of your business in real-time expressed as Assets = Liabilities + Equity. In this case, assets amount to anything that the company owns. They’re generally thought of as current – which can be easily or quickly turned into cash, or fixed – which are less easy or quick to convert.
Current assets include things like cash, accounts receivable, and short-term marketable securities. Fixed assets include things like property or equipment, long-term marketable securities, and intangible assets like patents and licenses.
On the other side, you’ll find liabilities and owner’s equity.
Basically, you’re going to use the balance sheet to get a quick snapshot of your company’s overall value.
Cash Flow Statement
You’ll understand the “what” from your P&L statement, but understanding the “how” is just as important.
That’s where a cash flow statement comes in. This document shows every incoming and outgoing transaction that your business makes, so you can gain a clear picture of both spending habits and earning methodologies. I think this is the most underrated of the 3 financial statements, as it speaks to the quality of earnings.
Your cash flow statement will monitor the following crucial activities:
- Financing: Debt acquisition, loan repayment
- Operations: Accounts receivable, accounts payable, inventory
- Investing: Assets sold or acquired, equipment changes, etc.
A cash flow statement gives both your internal leaders and your investors a good idea of how you’re managing the financial well-being of your company.
Need Help Understanding the Numbers?
As you can see, we shouldn’t underestimate the importance of these three financial statements. They may be difficult to understand at first, but they’re crucial to determining your business’ current and long-term financial health.
Not sure where to start? For the most meaningful ROI, it’s best to work with a fractional CFO who can provide digestible insight into each of these statements. Click here to learn more about how we can help you drive in-depth insights from each today.