Isn’t technology amazing?  Imagine an electronic signal being exchanged between asatellite and a little handheld box that provides your exact location.  Wikipedia records that the key to this capability is a globalnavigation satellite system developed by the US Department of Defense.  Referred to as the Global PositioningSystem (GPS) it has become a widely used aid to navigation worldwide, and a useful tool for map-making, land surveying, commerce, scientificuses, and even hobbies. It is also, the precise time reference is used in many applications including thescientific study of earthquakes.GPS is also a required key synchronization resource of cellular networks.  Formany business owners, the financial statements for their business seem equallyas technical, mysterious and complicated. The good news is that they don’t have to be pages of undecipherablenumbers.

 There are three key financial statements that businessowners should use to – like a GPS – determine the (financial) position of theircompany.  This article will providea brief overview of each of the three statements. Successive articles will lookat each statement in more depth. 

 Balance Sheet – Thebalance sheet reflects how much a business “owns” and how much the business“owes” as of a particular date. It is a snapshot in time. The balance sheet atthe end of one period (ending balance sheet) becomes the beginning balance sheetat the start of the new period. One side of the balance sheet – generally theleft –presents the assets or what the business owns. The other side of thebalance sheet – the right side – reports what the business owes to peopleoutside the business (creditors) and people inside the business (owners). Theyare referred to as liabilities and equity, respectively. Assets and liabilitiesare further divided in current and long term sections. The current portionreflects a belief that the particular item will turn over within a years time,i.e. inventory will be sold or liabilities will be paid within a years time.The long-term portion is expected to extend into the future over a years time. Various relationships among the balancesheet categories provide an indication of the financial health of the business.

 Income Statement – Theincome statement is a cumulative record of revenue and expense transactionsfrom the start of an accounting period – which may be a month, quarter or year– until the end of the accounting period. Business may choose to be on anaccrual basis or cash basis of accounting. These will be discussed at length ina later article. Suffice for now to state that even if a business uses the cashbasis of accounting, the income statement does not completely reflect the flowof cash in or out of the business because of various non-cash entries such asdepreciation. Most income statements have at least a revenue section andvarious expense sections such as cost of goods (service businesses an exception),selling and administration. Revenues minus expenses equal the bottom line – netprofit from operations.  There mayalso be other revenues and expenses for activities that are not part of thegeneral operation of the business and these are shown below the net profit fromoperations. More will be said when the income statement is discussed in depth.Obviously the owner wants net profit to be a positive number.

 Cash Flow Statement – Themost important (my belief), yet least used statement is the cash flowstatement. This statement reports the cash coming into the business and wherethe cash goes from the business. Every transaction has a cash implication whichif often missed by simply reviewing the other two statements. For instance, ifa business were to sell a product to a customer on credit, the business hasbecome a banker for the customer by providing a item from inventory for apromise to pay and has actually foregone the cash to which they are entitled. Therefore they have taken cash from the businessin the form of inventory and given it to a customer. This statement provides anindication of the businesses ability to pay its obligations. A negative cashflow statement indicates that the business is insolvent. Action is needed ifthe company is to meet its commitments. 

These statements will be explained in more depth in futurearticles.

Steven D. Olson, CPA, has extensive experience in a wide range of leadership, management and advisory positions. In the role of Chief Financial Officer, he provides executives with timely and accurate financial statements, ongoing cash flow projections, oversight over accounting and finance operations, as well as design and maintenance of the financial reporting structures.