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3 Tips On How To Understand Financial Statements

Tulsa HR Services

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How to use your financials for business growth

Many businesses often only refer to their income statement and bank accounts to measure business growth.  Unfortunately, the balance sheet and the statement of cash flows are often overlooked and can offer excellent insight into the true measure of a company’s success. When the income statement, balance sheet, and statement of cash flows are used in conjunction, they will offer the clearest perspective into the financial strength of an organization.  In order to properly use financials to elevate growth one must understand what each financial statement reveals.  

Using the income statement to get a bigger picture

The income statement provides a big picture view of revenue and expenses that occur over a specified time period.  An accurate income statement can be utilized to make informed decisions on taking steps to increase profitability.  For instance, the income statement might display growth in a particular product or service line and allow a business to shift their focus to that product, which will likely increase profitability.   The income statement is also a useful tool that can be used to determine what expenses might be deemed unnecessary.  In turn, allowing a business to reduce spending and improve the bottom line.

Measuring for growth with the balance sheet

How do you measure if a business has enough cash to remain solvent?  The statement of cash flows provides the ability to determine whether a business has sufficient cash to cover the day-to day-operations.  This measure is valuable, because cash is an important variable that seldom flows into a business at the same rate it exits.   Cash flow can be determined by adding operational costs, asset investments, and financing.  This is an important tool to help gauge if capital is required to support increased sales.  

Using the cash flow statement to find the pulse of the business

How do you measure if a business has enough cash to remain solvent? The statement of cash flow provides the ability to determine whether a business has sufficient cash to cover the day-to day-operations.  This measure is valuable, because cash is an important variable that seldom flows into a business at the same rate it exits.   Cash flow can be determined by adding operational costs, asset investments, and financing.  This is an important tool to help gauge if capital is required to support increased sales.

Each financial statement is an important tool in determining business growth, but individually they do not provide enough information to paint a full financial picture of a business.  The income statement can determine the profitability, but does not take into consideration delinquent payments that will affect cash flow.  Knowing how to understand financial statements, all 3 of them in particular, provides the best picture in determining business growth.

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