Making Sense of the Numbers

By: Jessica Rickard | April 5, 2021

There are many reasons why people start their own business. The number one reason, however, is so they can become their own boss. They want to be in charge! When you are the boss you have control over everything: schedule, workload, number of employees, and… financial statements.

I probably lost you at that last one… financial statements can be scary and most people don’t know how to make sense of everything on them. Let’s break it down.

How many financial statements are there?
Depending on your business, you may have different statements for different things, but there are three main financial statements.
Balance Sheet
Income Statement
Cash Flow Statement

Each of these statements play an important role in understanding the financial health of your business. They show you where your money came from, where it went, and where it is now – and that is pretty important to know when running a business. Over the next couple of minutes, I am going to break down each of these statements so you can better understand what these statements are telling you.

The Balance Sheet
The balance sheet shows you everything you own and what you owe at a certain point in time. More specifically, the balance sheet shows you your assets, liabilities, and shareholders equity.

Assets are things you own that have value. These items can either be sold or used by the company to facilitate sales. For example, any physical property, vehicles, inventory, equipment, even trademarks and patents are considered assets. Cash on hand and investments are also considered assets.

Assets are usually listed based on how quickly they can be turned into cash. Current assets are items you will convert in a year – things like inventory. Noncurrent assets are things that would take longer than a year to convert to cash – such as investments or intellectual property. Fixed assets are items used to help you generate revenue and profit – things like office furniture, equipment, or vehicles.
All of these kinds of assets are included in the balance sheet.

Liabilities are also shown on the balance sheet. Liabilities are amounts of money that you owe to someone else. Anything from money borrowed from the bank to your truck loan is considered a liability. Those are tangible examples. Liabilities can also be an obligation to provide a service to a customer in the future.

Liabilities are listed by the time you are expected to pay the balance within. Similar to assets, liabilities are classified as current or long-term. Current liabilities are obligations expected to be paid within the year. Long-term liabilities are due more than one year away.

Shareholder’s equity, also known as capital or net worth, is the money that would be left if you sold all of your assets and paid all of your liabilities. Anything leftover belongs to the shareholders, or owners, of the company – this is also called the “book value” of your company.

Your balance sheet is a living document that tells the history of your company by recording all of the decisions that management made to operate the company. It does not, however, show you how money flows into and out of accounts during the period – just the end result.

woman at desktop computer

The Income Statement 

People may argue that the income statement is the most important financial statement you have. The income statement shows you how much revenue you earned over a specific period. It also shows you the costs and expenses associated with that revenue. Finally, it shows you how much you earned or lost over the period. 

A good analogy for the income statement can be found here. This article explains that to understand the income statement you should look at it like stairs. Start at the top with the total amount of sales made during this period. Then, start going down the stairs. The income statement makes a deduction for certain costs or operating expenses associated with the revenue at each step. When you reach the end of the stairs, you have the total amount you either lost or earned in this period. This is your “bottom line.” 

Let’s break down the stairs a little more. At the top, you have the total amount of money brought in from sales – whether it is a product or service. This is referred to as gross revenue. This number is unrefined and has not had any deductions taken out of it yet. 

You go through a series of deductions – including discounts, allowances, returns, cost of goods sold, cost of sales, operating expenses, marketing expenses, depreciation, amortization, interest, and income taxes. You can find a more detailed explanation of these deductions here

The bottom line of the income statement shows your net profit or net losses. Net profit is also called net income or net earnings. This is the number that really tells you if you made money or not. 

The Cash Flow Statement 

The cash flow statement reports the inflows and outflows of cash in your company. This will help you determine if you have enough cash on hand to pay expenses and make purchases. The difference between the cash flow statement and the income statement is that the income statement tells you if you made a profit. The cash flow statement tells you if you generated cash.  

The cash flow statement is fluid in that it shows changes over time instead of absolute dollar amounts. It takes the information from the income statement and the balance sheet to give you an overview of cash flow (ha get it?) in your business. 

Cash flow statements are divided into three sections: 

Operating Activities 
Investing Activities 
Financing Activities 

Operating activities is the first part of the cash flow statement and analyzes your cash flow from net income or losses. This section reconciles the net income to the actual cash the company received from or used in operating activities. In order to do this, it adjusts net income for any non-cash items and adjusts for any cash that was used or provided by other operating assets and liabilities. 

Investing activities comes next. This section shows cash flow from all investing activities, which includes purchases or sales of long-term assets as well as invested securities. For example, if you buy a freezer for your restaurant, this would be reflected here as cash outflow because you used cash. 

The financing activities section shows cash flow from financing activities. This typically includes sources of cash flow raised by selling stocks and bonds or borrowing from banks. On the same page, paying back a bank loan would show up here. 

Connect Everything 

All of these financial statements relate to each other and give you the overview of your business’ financial health. I just threw a lot of information at you and some of it can be confusing and hard to remember. With Path by Simplex, you can have financial analysis done at the drop of a hat. Path analyzes your financial data behind the scenes and alerts you to pitfalls and hidden cash opportunities in your business. Path will also perform financial calculations and run them on a schedule – daily, weekly, monthly, or quarterly – and gives you insight into what that calculation means and how it affects your business. 

Path integrates with QuickBooks Online to give you a better picture of your company’s financial health. Start your free trial today! 

Jessica Rickard

Jessica Rickard

Marketing Specialist