Understanding and Using Business Financial Statements
Financial statements provide information about how well a business’s operations are performing. A business owner uses financial statements to evaluate current and past performance, identify existing financial issues, forecast (budget) future performance, make financing decisions, and more.
The two key business financial statements are the Income Statement and Balance Sheet.
- The Income Statement records revenue, expenses, and earnings over a period of time.
- The Balance Sheet lists the assets (resources owned by the business), Liabilities (what the business owes), and Owner’s Equity (owner’s investment), as of a certain day.
Financial statements may be presented on either a cash or accrual basis.
- Cash basis accounting reports revenue only when cash is received, and expenses only when cash is paid out.
- Accrual basis accounting reports revenue at the time it’s earned (when a service has been performed or goods have been sold), and expenses in the same period as the revenues they helped produce.
Financial Ratios are one of the core tools used to assess the financial performance of a business. Key ratios include:
- Activity (evaluation of a business’s efficiency, how well it’s managing assets or liabilities)
- Coverage (debt coverage provides an indication of the ability to meet obligations)
- Leverage (quantifies the relationship between debt and owner investment)
- Liquidity (measure the adequacy of current assets to meet current liabilities as they come due)
- Profitability (measures profitability relative to other financial measures, e.g., to sales)
Are you effectively incorporating financial planning into your business? If financial planning is an area you would like to work on, contact the Idaho Small Business Development Center today to begin working with a consultant.
About Debbie Winkler
Debbie joined the Idaho SBDC in February 2008. Her prior work experience includes the role of Business Improvement Consultant with Boise Business Consulting, a family-owned business. Prior to working in the family business, Debbie was Senior Vice President and Manager of National Consumer Training and Associate Development for Bank of America.
In addition, Debbie was Vice President and Manager of Business Banking for First Republic Bank, and Vice President and Portfolio Manager, Commercial Banking Group, for First Republic Bank (a predecessor of Bank of America). Debbie is a graduate of the University of Texas, Austin, with a Bachelor of Business Administration in Finance.
