Understanding Financial Statements

but, because they failed to realize the importance of analyzing and understanding financial statements.

Financial statements are the main way to report financial information to people within your organization...

such as management and employees and to people outside your organizations such as banks, investors, suppliers and others.

For example, a small excavating company significantly increased sales for three straight years then failed. The reason why? They overspent on equipment and overextended themselves by offering loose credit terms and discounts.

You can avoid these cash flow traps by doing a good job analyzing financial statements.

The principal four financial statements for a small business are the income statement, the balance sheet, the statement of owner’s equity, and the statement of cash flows. The order in which the statements are normally prepared and the nature of the data presented in each statement are as follows:

• Income Statement —a summary of the revenue and expenses for a specific period of time, such as a month or year.
• Statement of Owner’s Equity —a summary of the changes in the owner’s equity that occurred during a specific period of time, such as a month or year.
• Balance Sheet —a list of the assets, liabilities, and owner’s equity as of a specific date, usually at the close of the last day of a month or a year.
• Statement of Cash Flows —a summary of the cash receipts and cash payments for a specific period of time, such as a month or a year

All four financial statements should be identified by the name of your small business, the title of the statement, and the date or period of time.

The data presented in the income statement and the statement of cash flows is for a period of time. The data presented in the balance sheet is for a specific date.

Understanding financial statements is not rocket science. Most small business owners have basic financial information on their financial statements. So learn basic accounting principles and gain a basic understanding of how to fill out and read financial statements.

This information will help you with your day to day financial decisions in your business and aid you in your quest for financial success.

See this page for explanations and examples of financial statements for "Nonprofit" organizations:

Understanding Financial Statements for your Church or Nonprofit

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