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Using financial reports can help you make critical business decisions. The numbers in the financial statements should give you a general overview of how your business is doing. Comparing numbers from one year to the next can provide helpful information on income trends, expenses and inflation.
Basic financial statements consist of the following:
Income statement (profit and loss)
The income statement is a summary of transactions over a period of time. Usually measured monthly, quarterly and annually, the income statement is the place to look for how much net profit you made. Sales represent the income of the business and cost of goods sold represents the direct costs to make or provide sales. For instance, let’s say a company sold product A for $100.00 and it cost them $70.00 to manufacture/purchase/produce and ship the product; then the cost of goods sold amount would be $70.00. The gross profit would be $30.00, the difference between the sale and the cost of sale. Analyzing gross profit is important and the gross profit percentage, which is the gross profit amount ($30.00) divided by the sale ($100.00) is an important ratio for business owners to understand.
Net profit or net income is the difference between sales and all expenses. Operating expenses represent all indirect expenses in a business. Individual line items in the income statement should be reviewed often to determine spending trends and possibly spot errors.
The balance sheet shows financial position at a given point in time, again usually monthly, quarterly and annually. The balance sheet is based on the accounting equation of assets = liabilities + capital. Assets are anything the company owns, for instance, cash in the bank, inventory, amounts owed by customers and equipment. Liabilities are anything the company owes, for instance, loans and payments due to vendors. The equity section is what is left over, or the net worth.
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