What Exactly are Financial Statements?

May 28, 2019 by Roger Scherping

Hi, I’m Roger Scherping for ProjectionSmart.

So, what exactly are financial statements? Here's everything you need to know in 2 minutes.

The first financial statement is the balance sheet. The balance sheet has 2 sides. On the left side is everything that your business OWNS. So, cash, accounts receivable (the money your customers owe you), inventory, equipment like trucks and computers, and maybe some patents or goodwill. So the left side total is the sum of everything your business OWNS.

The right side shows everything your business OWES. You owe your vendors (accounts payable), payroll to your employees, and your bank for your line of credit and your truck loan. The right side total is the sum of everything your business OWES.

Also on the right side is your equity in your business. Notice that this is the difference between what your business OWNS and what it OWES. Think of it like the equity in your house. If your house is worth THIS, and on it you owe THAT, then the difference is your equity in your house. And just like with your house, the more equity you have in your business, the better.

The balance sheet is a snapshot of where your business is at a point in time. Notice that the total on the left equals the total on the right. That's why it's called a balance sheet!

Now back to equity. We said equity is good, so how do you get more of it? That's the next financial statement, called the income statement or the profit and loss, or P&L for short. The P&L shows how much you sold during the year, how much your expenses were, and what your profit or loss (your "bottom line") was. Here's the important part: the amount of your profit is the amount that you increased your equity during the year. That's why making a profit is so important: a profit increases your equity in your business!

The last financial statement is the cash flow statement. Understand this: the amount of your PROFIT for the year is NOT the same as how much CASH you generated during the year. The cash flow statement simply starts with your profit and then adds and subtracts different things until it shows you how much cash you generated during the year.

That's it. To really take control of your business, you need to understand all three of the financial statements. At ProjectionSmart, we can help!

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