How to read financial statements
Sitting in finance committee meetings, I have noticed that most board members, CEOs and even bankers have a difficult time reading their financial statements and are worried to ask questions regarding the numbers. Most people do not know where to begin and feel overwhelmed with all of the information presented.
The questions that need to be asked are, is the company profitable? Is the organization sustainable and are we moving in the right direction?
Reviewing the three financial statements (profit and loss, the balance sheet and cash flow projections) should be able to answer those questions for you.
Remember that the balance sheet is a statement of your assets (what you own) your liabilities (what you owe) and your equity. The balance sheet is a snapshot of that specific period in time. The profit and loss statement (or income statement) illustrates a company or organizations profitability. It starts with the revenue and deducts the expenses to show your net income. The income statement is run for a specific time frame (monthly, quarterly, yearly). And finally, the cash flow statements reports the cash generated. All three documents together help investors, clients and boards feel comfortable with making financial decisions on growth or reductions.
Keep in mind that although the statements present the entire story, check your assets vs your liabilities, you end of month cash and your net income. Once you have a grasp on your bottom line, you can then take a deeper dive into the details of the reports.
It is essential for small to med sized companies to keep accurate and timely financial statements. Businesses require sound financial advice in order to make important decisions and to accurately portray your financial health. Nonprofit leaders have to develop, at minimum, the basic skills in financial statements and management in order to confidently assist their Board of Directors in making decisions for the organization. Budgeting and financials statements can seem overwhelming at first, but having the basic knowledge of these three statements will help you to focus on your work and vision for your company.
Why do I need a CFO?
You didn't start your business or become the head of an organization because you are a financial expert. You are there to grow and succeed. The accounting, bookkeeping and financial aspects of your business are important to how you run your company, but it is time consuming and if not done properly, can lead to more headaches down the road.
Keeping track of your bookkeeping and your financial statements is time consuming and difficult to manage. But most frustrating is understanding and interpreting your financial picture from reports. CFOs are responsible for timely and accurate presentations and financial reports in order to capitalize on your growth.