How to Read Financial Statements
The financial statements your business generates provide the basis of future projections, insight into potential tax liabilities and your business’s progress over the years. It’s important to read them and to comprehend what they indicate, after all, they are the pulse of your business.
If you are serious about growing your business, then your accounting should be on a computerized software program that can produce a profit and loss, balance sheet and a general ledger. I’m talking about something more advanced than a spreadsheet program. The size of your business doesn’t matter, whether you have 10 transactions a month or 10,000, you should have systems in place to record your income and expenses, and provide you with important financial information.
Every transaction you make, whether it’s a sales invoice, a contribution of capital, or a payment for your office rent should be recorded in the general ledger and will end up on your financial statements.
Essentially, the profit and loss statement will show only your sales and deductible business expenses. The balance sheet shows the value of your assets: everything from how much you have in the bank, petty cash envelope or cash register to inventory, furniture, fixtures, and equipment among other things. It also shows the liabilities of the business that can include vendor bills payable, loans and credit cards payable. The difference between these two equals your equity position, which is the third element of the balance sheet.
Here is an overview of the profit and loss statement:
The Profit and Loss Statement
If you use QuickBooks for your accounting needs, then go to the top ruler bar and select Reports – Company and Financial – Profit and Loss. Change the dates at the top of the report to correspond to last calendar year. If you can’t stand the idea of looking at a bunch of numbers, then select the graph option to bring up either a bar chart or a pie chart representation.
The first line item on the profit and loss statement is operating revenue, which reflects sales. You may wish to break out sales by product or service type, this allows you to know how much is coming in from each source, and what products or services need more promotion or possibly abandonment. Be advised, just because a product represents a small percentage of sales, does not necessarily mean it should be abandoned.
Listed directly below sales are “returns and allowances.” You or your bookkeeper may have this broken out to titles such as discounts, customer refunds, etc. Keep an eye on this number: If returns are high, then you should take a good look at your product or service to see what is wrong and correct the problem. Your reputation is reflected in this number. Reputations are hard to build and maintain, even harder to reestablish.
Cost of goods sold is comprised of the expenses that directly pertain to the sale of your product or service and allocated overhead. In a retail business, this includes the cost of the inventory [...] Continue Reading…
Article source: http://smallbusiness.foxbusiness.com/legal-hr/2012/01/27/how-to-read-financial-statements/