Your business financial statements reflect its financial performance. Thus, it is vital for you to check these statements frequently. Watch this video as it describes how you can read these statements and analyze business performance in order to prepare an effective financial plan for the future.
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Launching a business and smoothly running it, is easier said than done. One study shows that 'lack of cash' is a big reason behind almost 30% of small businesses’ closure. This clearly shows the importance of managing your money wisely and planning expenditures properly.
Guide to Reading Financial Statements
1. The Income Statement
2. The Balance Sheet
3. Cash Flow Statement
1. Take care of the income statement
What it Shows?
It shows your company’s financial performance over a specific period; for example; monthly or quarterly.
The most common method to assess your financial performance (gross margin) is to divide total revenue by gross profit.
- Gross margin = Total revenue/Gross profits
- Revenue: The money you made without taking out expenses.
- Gross profit: Also called as gross income: Gross profit = Total revenue – COGS
- Costs of goods sold: Costs of raw materials, labor, commission paid to employees.
- Operating Profit: Also called operating income: Operating profit = Total revenue – COGS - Operating expenses
- Interest Income: The money earned as interest such as from a savings account.
- Interest Expense: The money paid as interest on borrowed money.
- Income Tax: The money you pay while filing the income tax return.
How to read:
• Start with the top: Is total revenue matches with your expectation?
• Go to the bottom: Is your net ..
