Financial Fluency: Understanding the Financial View
December 31, 2019
It’s entirely possible for your business to be largely profitable, but struggle financially. Businesses must make a profit in order to achieve these three things: employees to have a job, customers to have goods and services to buy, owners and shareholders to get a return on their investment.
There are three primary reports that look after how your company is performing. Each report ties into the next. If one changes, so changes the others. These reports make up your company’s financial view.
Every business should have three end goals: to fulfil a need for a product or service in a way that is profitable for the company to provide, get a return on the investments you put into your operation, and a healthy cash flow to maintain stable operations.
Summarized, these three goals make up three financial statements, the income statement, cash flow statement, and balance sheet, respectively.
The income statement measures the sales your business generates and the money you bring in. It also measures the expense of delivering your products or services, as well as the profit you make after all your bills are paid. To make a profit, your revenue has to outweigh your expenses. This difference is your profit margin. This report reflects the activities of your business over a period of time, which can be a month, a quarter, or a year. We often use this statement for year-over-year comparisons of monthly or quarterly timeframes to compare operations.
Beginning Balance Sheet
The balance sheet reports the value of all assets in your possession, and the money within the company. It keeps track of your liabilities with records of the debts you owe to others and tracks your equity so you know how much your company is worth on paper, or another way to think about it is your investment in the company. In order to have equity, your assets must outweigh your liabilities. This difference is your equity. The balance sheet is like taking a snapshot of where your company stands financially at a specific point in time.
Cash Flow Statement
The cash flow statement is the link between the income statement and the balance sheet. It is a necessary summary of your collections and payments to show how one financial report directly affects the other. Each business transaction makes a difference in the other reports at large. If you make a profitable sale, but you haven’t collected the money, how does that affect your profits and business at large?