What Is Your Company’s Story?

Every financial statement tells a different story: What is your company’s story? Do you know? by Dr. John E. Ware, I

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Business owners should understand the basic financial statements to make informed business decisions. How can a business owner make sound business decisions without knowing the numbers? Financial statements provide useful information regarding a company’s financial condition.

Financial Statements are interconnected and must be prepared in the following order:

1. Income Statement – The income statement measures the company’s financial performance and profitability for a particular period of time (i.e. monthly, quarterly, and annually). Revenue and expense accounts are reported on the income statement to determine the net income or net loss. Revenues less expenses equal net income or net loss. The net income or net loss is needed to prepare the owner’s equity statement.

 2. Owner’s Equity Statement - Second, the owner’s equity statement shows the increase or decrease in equity for a particular period of time (i.e. monthly, quarterly, and annually). The beginning capital balance plus additional investments by owner plus net income or less net loss less owner’s drawings equal ending capital balance. The ending capital is reported in owner’s equity section of the balance sheet.

3. Balance Sheet - The balance sheet presents a snapshot of the company’s assets, liabilities, and owner’s equity as of a specific date (e.g. As of January 31, 2017). It is important to review the most recent balance sheet. What are the company’s total assets? What are the total liabilities (total debt obligation)? How much equity does the owner have in the business?

4. Statement of Cash Flow - The statement of cash flow displays the inflows and outflows of cash from operating, investing, and financing activities. Where is the cash coming from (inflows)? and Where is the cash going (outflows)? are two important questions for a company's business decision making abilities. Cash inflows and outflows are like the inflow and outflow of oxygen for humans. Suppose all the oxygen is vacuumed out of a room. A person would begin gasping for air and finally collapse. Similarly, a business would struggle if all the cash was extracted out and eventually collapse without cash inflows. Companies rely on cash flows to survive.

Do you know your company’s story?