What do those monthly financial statements mean?
For non-accountants, financial results can be confusing. Terms like balance sheet, working capital, EBITDA, etc. are tossed around freely like some sort of second language. What do they mean and how should a non-accountant monitor their monthly statements? Here are some key measurables to quickly get a handle on how your business is doing.
• Balance Sheet – One of the required financial statements. This is a snapshot of your company as of a specific date (usually, the last day of an accounting period). It presents your company’s assets, liabilities, and equity.
• Working Capital – Calculate this by subtracting current liabilities from current assets. Both of these figures are often presented on your balance sheet. Working capital reflects the cash available for day-to-day operations of a company. Obviously, the higher the number, the better.
• Net Worth – This is the equity of the company or, another way to think of it is, the value of a company to its owners. It can be calculated from your balance sheet by subtracting total liabilities from total assets. Obviously, the higher the number, the better.
• Statement of Income (alternatively Statement of Operations) – This is one of the required financial statements. It is a summary of the company’s profitability (or lack of it) over a certain period of time (month, quarter, year).
• Gross Margin – This comes from the income statement and is usually the difference between sales revenue and cost of goods sold.
• Operating Income – This is usually a subtotal on the income statement and reflects the income earned from a company’s primary business operations.
• Net Income – The “bottom line” is typically shown as the bottom total on the income statement which is the total revenue of an accounting period minus all expenses during the same period. Net income includes non-cash expenditures like depreciation and amortization. Net income is different from cash flow because accountants make “accrual-type” adjustments to make net income the most meaningful measurement of company performance. Obviously, the higher the number, the better. (Catching a trend, here?)
• EBITDA – This is a key measurable used by banks and others to measure financial performance. It is computed exactly as its name would suggest: earnings before interest, taxes, depreciation, and amortization. It is rarely shown on external financial statements. However, all components of the formula can typically be found on the income statement. Depreciation and amortization may be only found on the statement of cash flows.
• Statement of Cash Flows – One of the required financial statements. This very useful schedule summarizes cash inflows and outflows in a company over an accounting period (month, quarter, year). Since “cash is king,” a business owner should closely monitor this statement. Specifically, are cash flows from operations strong and flowing? Are cash flows provided by and used in investing and financing activities appropriate to meet the company’s objectives? This statement is on the “cash basis” and sets forth cash totals in those categories. Strong companies generate significant positive cash flows from operations. Cash flows from investing and financing activities may be positive or negative, depending on business objectives.
With an understanding of the above terms, you can look and sound like a CPA! Monitoring trends from period to period in the above areas will ensure you are on top of the financial side of your business. Hopefully, your numbers are trending up!
Still confused? Contact John Troyer, a partner at Ciuni & Panichi, Inc., to help. He can be reached at 216-831-7171 or jtroyer@cp-advisors.com.
