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.