Guide to Analyzing and Interpreting Financial Statements

Published on Business.com, by Francine Huff, October 09, 2009.

Understanding the financial details of your business – and, at times, being able to communicate them to others – can mean the difference between success and failure. Informed business owners pay attention to the numbers that show whether a business is profitable, has cash flow problems or is spending too much in certain areas. Analyzing financial data also can help you set business objectives on a monthly, quarterly or yearly basis. Here are three reasons to organize and study financial statements:

  • Get an overview of how your business is doing and where it is heading.
  • Keep control of general and administrative expenses.
  • Careful records can help attract investors to your business.

Action Steps – The best contacts and resources to help you get it done:   

Discover the details of different financial statements:

  • The income statement and balance sheet are the main parts of a financial statement. Income statements, also called profit and loss (p&l) statements, show the money in (income, revenue and sales) and money out (expenses and costs) of a business. What’s left over is the profit. Balance sheets show what a company owns and what it owes. A cash flow statement looks at ways cash enters and leaves a company.
  • I recommend: Get up to speed on financial statements at StudyFinance or Tutorialized. At StudyFinance, from the University of Arizona, you can get a particularly succinct overview and examples of key statements, including the balance sheet, income statement and other basic financial statements.

Know the important line items:

  • There are several key pieces of information you’ll want to analyze. Working capital is determined by subtracting current liabilities from current assets. Look at the amount of revenue you earn on a monthly, quarterly and yearly basis to see if you are meeting your business objectives. Compensation may be one of the biggest expenses if you have employees. Don’t forget to include the costs of your own salary and benefits.
  • I recommend: The U.S. Small Business Administration has a helpful section on financial statement basics for business startups. You’ll find detailed explanations of balance sheets and income statements.

Enlist software help to get your financial ducks in order: … (full text).

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