How To Read And Understand Financial Statements As A Small Business

 How To Read And Understand Financial Statements As A Small Business

hey there aidan here from bench accounting today we're going to talk about financial statements what they are how to read them and how to actually get value from them for originating real business decisions let's begins with the definition financial statements are reports that summarize important financial information about your business there are three main types of financial statements the balance sheet income statement and cash flow statement we'll look at what each of these three accounts do and how they work together to give you a full picture of your company's fiscal state if you are required a template for the balance sheet income statement and cash flow statement you can find links to those in the description below let's begins with the balance sheet[ Music] a balance sheet is a snapshot of your business finances as it currently stands it say to you about the assets you own and obligations aka obligations that you owe at a particular point in time balance sheets are broken up into three general

 categories resources liabilities and equity here's what it looks like this one happens to be the balance sheet for disneyland assets are anything valuable that your business owns including currency agency furniture stock-take patents etc sometimes they're broken off into current assets and determined assets like you see here current only represents it's cash or currency equivalent something you can sell speedily next we have drawbacks obligations are debts you owe to other beings these can be things like credit card debt mortgages and accrued outlays such as practicalities taxes or wages owed to hires like assets they're normally split into current indebtedness that you owe within the next 12 months and long-term debt beyond 12 months the last category is equity equity is the remaining value of the company after subtracting indebtedness from resources equity can come in the form of common stocks like when you buy stock in a company like apple or in the form of retained earnings which is the amount of net income left over for your business after you've paid under any dividends to shareholders now here's where the whole balance part of the balance sheet comes in the value of the asset section will always

 poise with the liabilities and equity section that's the balance sheet equation assets equal obligations plus equity so you can see on the disneyland balance sheet the value of the assets is the exact same as the indebtedness plus equity that's how you know they developed the balance sheet right that's a quick-witted overview of the balance sheet big businesses like banks prepare a balance sheet every day small businesses like a brand new etsy shop might simply prepare a balance sheet every three months it all depends on how many assets are moving in and out of your business now what can you really learn from a balance sheet tons of things for one you can measure the liquidity of your business with the current ratio which is current assets divided by current drawbacks this say to you if you'll be able to pay off your obligations in the next 12 months and there's lots of other beneficial fractions you can calculate use exactly your balance sheet next let's talk about the income explanation the income testimony tells you how much coin your business has spent and how much it has earned in a specific period that lets you calculate your net profits otherwise known as your bottom line the reason it's called the bottom line

 is because net profit is at the bottom of your income account here's what an income explanation looks like this one is from apple it has six main sections receipt cost of revenue gross profit which is revenue minus cost of revenue operating expenses operating income or loss taxation and other non-operating expenses and net profit let's go through what each section means we'll make it quick revenue is how much coin you demand fairly basic cost of revenue or costs of goods sold is how much coin it costs to make and distribute your product or service this doesn't include things like the costs of your bookkeeper or the cost of rent those are operating costs gross profit is your revenue minus cost of revenue essentially how rewarding your products and services are operating expenses are all the other costs of rolling a business utilities hired support staff who aren't procreating or administering your commodities etc you can see for apple they also include research and development now since the r d squad isn't exactly moving makes they're just do research that is likely or may not lead to a brand-new product operating expenses are also known as overhead operating income or loss is your gross profit minus operating expense this shows you how productive your entire business is how efficient your business is

 at making money you might have a nice gross profit but you expend behavior too much on lease and office snacks so overall you're losing money after you calculate your operating income or loss you need to take into account things that are somewhat out of your regulate chiefly taxes after you've subtracted taxes from your operating income or loss you get the bottom line your net income that's how much coin you walk away with after you've subtracted everything else the value of the income statement is a little more obvious to most people compared to say the value of the balance sheet it shows you if you're making money if your business is rewarding or not that is super handy more than that it shows you if you're expend too much money make your commodities or if you're spending too much money on overhead the cost of running your business more generally you'll want to consult your income proclamation regularly if you want an income statement of your own you can click the link in the description where you'll find a simple income statement template of your own created by our professional bookkeepers now at workbench if you don't want to do your own bookkeeping and spawn your own income words you can check out bench we'll do your bookkeeping for you and send you an income statement every month anyway on to the last financial statement your cash flow statement the cash flow statement tells you how much currency penetrated and left your business over a particular time period you might ask isn't that the same as the income word no the income testimony goes to show

 how much you waste and how much you saw the cash flow statements establish you what the cash world of your business is this is most relevant for businesses that use the accrual basis of accounting let's say your income statement told that you compiled ten thousand dollars in progress but your cash flow statement told that you only saw five thousand dollars in money what's going on well it could be that you is sending out two debits to consumers for five thousand dollars each if you're using the accrual plan of accounting you would record that ten thousand dollars as income in rally even though you haven't gotten give yet then one client wages you but the other client is late your income account would say ten thousand dollars but your cash flow statement would say five thousand dollars it's super important to know what the currency statu of your business is if you don't have cash you can't remunerate monies even if you have accounts receivable money on the best way to you this is something that a cash flow statement looks like this is one from the toronto raptors the cash flow statement has three roles the first is cash from operating activity this is all the core business activity buying stuff and selling trash below that you watch accommodations things like accounts payable and luxury taxation taxes aren't from operating activity but they still come out of our money so we subtract it accounts payable technically isn't a cash transaction at all nonetheless on the income explanation it's marked as an overhead even though it's fund that hasn't been paid out hitherto so we add it back into the cash flow statement so we get an accurate picture of how much cash we actually have today next is cash flow from investing in your business so not the regular buying and selling of your core business but things like material wield vehicles etc in the case of the toronto raptors now they bought an ice bathtub

 tub and a hyperbaric chamber for athletes to recover after sports and they also sold a recompression chamber the last category is currency from financing tasks this includes money the owner invested in the business as well as taking out and restoring loans on the rapture statement we receive there was an owner's describe which makes the owners withdrew 225 000 from the business this basically means they paid themselves if you supplement all three categories together you get the total change in cash if you include the beginning cash to the total change in cash you get the ending cash and for good measure you check your culmination cash against what your bank account actually says to make sure you added everything up correctly if you want to create your own cash flow statement you can download our template in the specific characteristics below precisely plug in your amounts and you

 have a basic proclamation you can use to analyze your cash situation today that's the end of our financial statements crash course if you're an record pro abusing statement software you can create these statements yourself if you're less comfortable with statement you're probably going to want to hire a bookkeeper to make love for you if you don't have a bookkeeper today check out workbench we'll do your bookkeeping for you and send you financial statements every month so you are eligible to obligate smart business decisions and stay on top of your finances that's it from us here at workbench good luck on your entrepreneurial pilgrimage and joyou bookkeeping

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