Your Core Four Financial Statements

When it comes to understanding the health and status of your business, there’s no better resource than your core four financial statements. These statements offer you a look into your business vitals, in the same way that your yearly physical gives you an idea of how you’re progressing and what needs your attention. Can you get by without both? Sure. Will it be sustainable over time? Absolutely not.

This is the first article of a four part series that will dive deep into the financial statements you need to understand the health of your business. We’re opening the series with a review of the foundational four – Balance Sheet, Income and Cash Flow Statements, and Retained Earnings. If after reading through them you still have questions, reach out and we’ll make sure you're moving forward on solid footing.

With that said, let’s jump right in.

Your core four financial statements (and why they matter):

Balance Sheet

The balance sheet is to your business what cement is to a builder. Foundational. It offers you a look into how efficiently your business resources are being put to use, broken down by assets (what you own), liabilities (what you owe), and equity (the difference  between your assets and liabilities). When it comes time for your business to plan long-term, raise capital, or approach a sale, it’ll be the clearest representation of overall business health and provide the insights needed.

In terms of future planning, the balance sheet is a great tool for assessing your financial position through metrics and determining the path forward. You can determine your ability to pay off debts over the next 12-months using the current ratio or your debt coverage with the help of the debt to equity ratio. Not only that, you can also compare balance sheets from year to year to assess health changes throughout the business and monitor how vitals are performing.

To learn more about the balance sheet, how to read it, and take action, check out our detailed write up.

‍Income Statement (P&L)

Your income statement, otherwise known as your profit and loss statement, is home to your revenues, expenses, profits, and losses. It’s best for assessing profitability in snapshots and will give you insights into the levers impacting  your financial stability over time. Did sales revenues take a dip this quarter, and if so, why? Did you have a large expense come up that wasn’t planned for? Did Starbucks raise its prices again? Whatever it may be, you’ll find it all here.

For future planning, the income statement is a fantastic tool to  assess recent activity and make informed decisions on the fly. You’ll be able to see which parts of your business are performing best and driving growth, and which aren’t. The income statement will help you realign your objectives to ensure you’re always moving in the right direction.

To learn more about the income statement, how to read it, and how to take action, check out our detailed write up.

Cash Flow Statement

Show me the money. Your cash flow statement (CFS) is what Jerry McGuire was really looking for, and it’s home to the cash that flows in and out of your business. It’ll offer key liquidity insights into how well you’re managing your cash position, how much is available to pay debts and other obligations, and how capable you are of funding future initiatives.

In terms of future planning, the CFS is great for assessing the immediate health of your business, as it doesn’t have projections built into it like the income statement. You’ll be able to make decisions regarding  investments and projects knowing that you’ve got an accurate view of the entire financial picture.

To learn more about the cash flow statement, how to read it, and how to take action, check out our detailed write up.

‍Retained Earnings

‍Your statement of retained earnings tracks changes in equity over time and offers insights into whether or not your business kept any profits in house once paying off dividends and stockholders.This statement can be compared to quarters and years past to determine trends in profitability.

Retained earnings statements aren’t nearly as important as the other three, but it comes into play when you are fundraising or looking to borrow money. For this reason, it should be prepared alongside the other three statements to capture the most complete view possible of your financials.

Although we aren’t doing a deep dive into retained earnings ourselves, you can learn more by checking out this article on the topic.

Tying it together:

‍As the financial and accounting world continues its transition to the cloud, relying more and more on technology-leveraging software, it’s never been easier to collect data, review it, and make informed decisions. Nothing beneficial will come from assessing and taking action on your financial statements if they aren’t accurate. In fact, making major decisions on false information is one of the worst things you can do for long term growth and stability. ParallelCFO pairs a team of financial experts and industry leading tools to ensure that your books are accurate, timely, and packed with valuable insights – ready to be acted upon.

If you’d like to learn more, get in touch with our team.