Reviewing financial statements probably isn’t your favorite part of owning a business. After all, you opened your business to follow your passion, not to study paperwork.
Even so, you need to know where your business is today to make informed decisions for tomorrow.
Redwood Credit Union’s business banking team offers three tips to help you easily understand your financial statements (and get back to doing what you love).
1. Know that your bank statement is not your financial statement. Just because your monthly bank statement shows a large balance doesn’t mean all that money is available for spending. It may be earmarked for other expenses. Examine
your financial statement each month instead.
2. See the big picture. Your financial statement provides an overall picture of your business’s activities and financial performance. Analyzing statements over time can help you see patterns in performance or the impact of decisions
on your bottom line.
3. Balance Sheet + Income Statement + Cash Flow Statement = Financial Statement. Your financial statement is made up of your balance sheet, income statement, and cash flow statement. Get to know each, and how they work together.
- Balance Sheet. Your balance sheet shows what your business is worth at any given time. It includes your assets (or what the business currently owns), including cash, real estate, inventory, money owed from others, etc. The
balance sheet also lists liabilities (or what the business currently owes), including bills, taxes, loans, etc. Total assets minus total liabilities equals what your business is worth.
- Income Statement. An income statement covers a range of time—3 months or a year, for instance—and shows your revenues and expenses. Your net income is your business’s profit or loss for that time period and is calculated
from the difference between your total revenue and total expenses.
- Cash Flow Statement. The cash flow statement shows where money is coming from and how money is being spent. Cash coming in includes sales, collections, and money from loans. Cash going out includes purchases, inventory, and
rent. Calculate your cash balance by subtracting the total cash out from the total cash in.
A change in the net income (from the income statement) will cause a change in the amount the business is worth (in the balance sheet).
Understanding your financial statement will help you make informed decisions based on your business’s actual financial performance and current situation. You’ll also be better able to discuss and explain your business needs and goals with
your mentor, financial advisor, or financial institution. This is especially important when you want to ask for additional financing, since your lender will need a clear picture of your business to make a decision.
Marcus Myers, owner of Flooring FX, switched to Redwood Credit Union to help with his business banking needs in the late 1990s. He was immediately impressed with the personal interest RCU took in getting to know him and Flooring FX.
“They care about what’s happening with the business and how they can help me. If I have any questions, it’s a personal interaction,” he says.
This personal connection makes it easy for Marcus to turn to Redwood Credit Union for answers to his questions. And because RCU has invested time getting to know Marcus and his business, the credit union can provide quick and effective solutions.
To learn how RCU can help you understand the financial needs of your business, call 1 (800) 479-7928, visit redwoocu.org/business or stop by one of our many locations.