How to Read Financial StatementsEssential Small Business Accounting SkillYou have to learn how to read financial statements if you are to stay on top of your small business accounting responsibilities. Regardless of why you decided to go out on your own, to a great extent, building a successful business is about managing money. As an owner, you have to manage the financial aspects of your business, balancing costs with potential returns. Financial reports provide information not always visible on the surface. Much like x-rays reveal indications about physical health, financial statements tell you about your fiscal health. And just as a doctor learns to interpret x-rays, you can learn to read and interpret financial statements. The business game is a repeating cycle of selling goods and services, making money, and reinvesting to grow the business. To win, you must have profits at the end of the cycle. To win long-term, you must apply your profits to further your business interests. So your understanding of financial tools, such as financial statements, and your ability to use them can make the difference between creating a strategic game plan, and playing a game of chance. Two Types of Financial StatementsWhen it comes to knowing how to read financial statements, it starts with knowing that there are 2 different types and how to differentiate between them, so that you can use each type of financial statement appropriately. They are:
Your Balance SheetThe balance sheet is a type of financial statement that presents a snapshot of your business at a given point in time, balancing what you own against what you owe. OK, so let's look quickly at some of the key points of how to read financial statements that are balance sheets... On the Balance Sheet, total Assets should equal Liabilities plus Equity - and they must always balance. Now that you know what you own and what you owe, are you making money? The Operating StatementLet's look at the Operating Statements to see where your money's going. You made a sale, generating revenue... Imagine if you could keep it all. But, what about the delivery charges? And the inventory you bought? These costs are directly related to goods you sold, and vary with volume. So subtract them from revenues to get your gross profit, or margin. Can you keep the Gross Profit? Not quite... Remember your rent? And what about your phone? Heat? Utilities? Parking? Gas? And don't YOU deserve to be paid? These are Operating Expenses, the day to day costs of running your business. After deducting them, you're left with Operating Profit - money you can use to grow your business - or can you? Don't forget the tax man, who must always be paid... What's left after that is your Net Profit. Are You Positioned to Win the Game?Think of your business as a game you must win to survive. It's about knowing where you r money's coming from, where it's going, and what you could be doing to keep more of it. The object is to run the business so you can increase the value of what you own - your equity on the Balance Sheet. Each time you make a decision about your business you impact your finances directly or indirectly. As you learn how to read financial statements to gauge the performance of your operations and finances, so you can improve the quality of your planning and decision-making. In SummaryThe Operating Statement summarizes your operating activities charting cash as it moves into and out of your business. The Balance Sheet presents a snapshot of the results of these activities at the end of a period. Check your score regularly - certainly at the end of your fiscal year - and whenever you want to know the "net worth" of your business. A monthly review is a good rule of thumb. When you understand the relationship between financial statements items, you can get a reading on how well your assets are working for you. So, master these small business accounting skills and learn how to read financial statements effectively!
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Additional information on financial forecasting and the other important aspects of business finance is available in the Business Buffet 5-in-1 video program: Financial Forecast, How to Read Financial Statements, Financial Analysis, Cash Flow Forecast and Bookkeeping. 
