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

 There are three key financial statements that business owners should use to – like a GPS – determine the (financial) position of their company.  This article will provide a brief overview of each of the three statements. Successive articles will look at each statement in more depth. 

 Balance Sheet – The balance 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 at the end of one period (ending balance sheet) becomes the beginning balance sheet at the start of the new period. One side of the balance sheet – generally the left –presents the assets or what the business owns. The other side of the balance sheet – the right side – reports what the business owes to people outside the business (creditors) and people inside the business (owners). They are referred to as liabilities and equity, respectively. Assets and liabilities are further divided in current and long term sections. The current portion reflects 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 balance sheet categories provide an indication of the financial health of the business.

 Income Statement – The income statement is a cumulative record of revenue and expense transactions from 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 an accrual basis or cash basis of accounting. These will be discussed at length in a later article. Suffice for now to state that even if a business uses the cash basis of accounting, the income statement does not completely reflect the flow of cash in or out of the business because of various non-cash entries such as depreciation. Most income statements have at least a revenue section and various expense sections such as cost of goods (service businesses an exception), selling and administration. Revenues minus expenses equal the bottom line – net profit from operations.  There may also be other revenues and expenses for activities that are not part of the general operation of the business and these are shown below the net profit from operations. 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 – The most important (my belief), yet least used statement is the cash flow statement. This statement reports the cash coming into the business and where the cash goes from the business. Every transaction has a cash implication which if often missed by simply reviewing the other two statements. For instance, if a business were to sell a product to a customer on credit, the business has become a banker for the customer by providing a item from inventory for a promise to pay and has actually foregone the cash to which they are entitled. Therefore they have taken cash from the business in the form of inventory and given it to a customer. This statement provides an indication of the businesses ability to pay its obligations. A negative cash flow statement indicates that the business is insolvent. Action is needed if the company is to meet its commitments. 

These statements will be explained in more depth in future articles.

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.