Making Sense of Financial Statements

Day-to-day operations take up most of your time and energy, and you know you can't ignore the financial statements. You probably need some guidance in reading and making sense of them.

Financial statements are important because they can help to both uncover problems and identify corrective action. The most important financial statements are the balance sheet, the profit and loss (income) statement, and the cash-flow statement.

A balance sheet is nothing more than a list of the accumulated assets and liabilities incurred by the business. The difference between the two represents the net worth of the business. The profit and loss basically answers the question, "How did we do?" and the cash-flow statement answers the question, "Where was the cash used?"

Understanding these statements is crucial, since they all tell you what's happened in the past. But more important from a management perspective is what's going to happen in the future. Therefore, developing both a profit and loss forecast plan and a cash-flow forecast plan is essential to making the historical data more meaningful.

With a forecast in place, you'll have the ability to get data (via your financial statements) that tells you how you did compared with your plan. You should also be able to figure out what went wrong and how to correct any problems.