Understanding Financial Reports

The first thing you learn when you
study accounting is that it is more than simply tracking numbers. Yes,
the majority of what a bookkeeper or accountant does is inputting and
categorizing every transaction in or out made by a business. But, it’s
also about knowing the health of a business. Perhaps the most confusing
part of bookkeeping for business owners are financial reports. It’s more
than how to read them. Most business owners, especially first time
business owners have no idea what data goes into what reports. Without
this basic information you might as well read the back of a box of
cereal for all the good it does you.

The inherent threat of fraud has forced the accounting industry to
put into place many rules and regulations to prevent individuals (and
companies) from playing with their numbers. These standards also dictate
what data goes into what reports. As times change and individuals
become more adept at finding loop holes in the older rules and
regulations new rules are put into place. However the standards that
have been setup for reporting have not changed.

There are four main accounting statements business owners can use to
evaluate different information about their businesses financial health.
Understanding how each statement is meant to be used should help you to
read the information contained within each one.

The Balance Sheet is the go to statement for most
business professionals because it shows in real time what your company’s
liabilities are (what you owe) and what assets your company has (What
you own).  This is also one of the easiest statements to run as it is
pulling current balances and not tracking during a set timeframe.

The Income Statement shows how your business has
performed during a specific time period. This statement is able to do
this by showing how much the company earned and how much the company
spent over a specific period of time.

The Statement of Retained Earnings is used to show
how much the company is paying out to shareholders via dividends and
what portion of the companies’ income was retained during a specific
time period.

The Statement of Cash Flows is the statement your
creditors will ask for when evaluating your business. The reason they
like this statement best is because it shows not only that you have
income coming in, but where that income is coming from. This statement
also shows where you are spending money. Again, this statement is run
for a specific time period.

These are the basic financial reports that will show you the health
of your business. But there are other reports that you may need to run
periodically. Reports for taxes for instance are extremely important,
but are run less often as they put everything in specific alignment for
filing in those dreaded tax forms. Another report that can be run, but
often is overlooked is the employee compensation report. This report, no
matter what name it is given, shows how much you have paid your
employee, contractors, etc. as well as what you have paid per person for
taxes, insurance and more.

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