Anyone can say that their business is doing well, but the truth lies in the numbers. All stakeholders, including investors, bondholders, and creditors, are interested in financial statements because they show how sound a company is. They reveal how much revenue a business generates and how well it manages its assets and liabilities.
Companies use three types of financial statements to present their financial performance. These are the profit and loss (P&L), balance sheet, and cash flow statements. Here’s a simple guide to help you understand how each one works and how they’re related.
Profit and Loss Statement
Profit and Loss statements are also known as income statements. They’re usually the first thing investors look at because they show how profitable a company is. Companies generate P&L statements on a quarterly and annual basis. They usually precede the balance sheet and cash flow statements because they don’t require much information from the other two statements.
The sales revenue sits at the top of the P&L statement, followed by a deduction of the cost of goods sold (COGS). The resulting value is your gross profit, and you must adjust it if there are other operating expenses and income. The end value is your net income.
- Compares costs against revenue over a specific period
- Net income is the end product of P&L statements
- Net income is calculated by adding revenue and gains and deducting expenses and losses
Balance Sheet Statement
A balance sheet is a snapshot of a company’s assets, liabilities, and shareholders’ equity at a given time. As the name suggests, the two sides must balance. That means the assets should equal the sum of the liabilities and equity.
The asset section starts with cash and equivalents, which should reflect the amount at the end of your cash flow statement. You then include the net income from your P&L statement in the balance sheet as an adjustment in retained earnings.
- Displays the company’s financial position for a specific period (i.e., as of September 30, 2022)
- Made up of three sections: assets, liabilities, and shareholder’s equity
- Assets = Liabilities + Shareholder’s Equity
Cash Flow Statement
Cash flow statements combine the data from P&L and balance sheet statements to show how much cash is going in and out of a company. They help business owners, investors, and analysts determine where the money goes and if the company is managing cash well.
Cash flow statements base the inflow and outflow of cash on the changes in the balance sheet. They display the beginning and ending cash balances and the cash changes for every period. Accounting principles like accruals don’t apply in cash flow statements as they only show movements in cash.
- Displays inflows and outflows of cash over a specific period
- Shows the change in the cash balance from the beginning to the end of a period
- Includes cash from operations, financing, and investing
- Excludes accounting principles and only acknowledges cash movements
Financial statements are crucial in business because they give a glimpse into a company’s financial health. They provide valuable insights into cash flow, performance, and operations. If you have healthy numbers in your financial statements, you can make a strong impression on your stakeholders and build lasting relationships with them. For more information, contact Action Coach Lincoln at 402-587-6329.