If you are planning to start a new business, currently own a business, or you are considering investing in a business, you need to know how to read financial statements. You don’t need an accounting degree, but you do need to know the basics. Financial statements reflect the financial health of a company. There are three main financial statements-the balance sheet, income statement and statement of cash flow. A balance sheet provides details about a company’s assets, liabilities and shareholders’ equity. It represents a “snapshot” of the company’s financial position. The income statement shows how much a company earned or lost over a specific time period. The cash flow statement report a company’s inflows and outflows of cash. This is important as it indicates whether or not a company has enough cash to pay its expenses (i.e., payroll) and purchase assets. Because all of these financial statements are related, not one financial statement alone tells the complete story. Therefore, you need to review all of them at the same time. Understanding this information can give insight into the financial strength (or weakness) and earnings capacity of a business.
Not to be intended as a substitute for professional tax and legal advice. Please consult with a qualified tax professional and/or lawyer.