Financial Literacy – Three documents you should know

Too often, business owner’s eyes glaze over as soon as Financial Statements are presented.

Everybody running a business or being on the board of an organization should know at least these three reports and know why they are used.

Balance Sheet:

In accounting, we consider these accounts as permanent. They don’t reset by the end of the year and carry information of all things an organization owns (assets) and owes (liabilities). The balance sheet is generated as of a particular date. It shows the financial position at this moment in time. All your assets must equal all your liabilities/equity.

Income Statement (also known as Profit & Loss):

This document sums all your expenses and all your income sources. This statement dates a range of dates. For example, from January 1st to March 31st. These accounts reset every accounting period and start over at the beginning of your fiscal (accounting) year. The Income Statement tells the reader how much money was spent on a variety of expenses. It also tells the reader how much your organization has received in funding. An Income Statement is often combined with a budget. This way the reader can compare the actual spending to what was budged for the same period.

Statement of cash flows:

In many cases, this document shows the reader the cash position of the organization. This document can be a mix of both – Income Statement and Balance Sheet. Personally, I think it’s the most useful for executives to work with. Most people operate their finances by how much money they spend and how much the still have. This document will show you how much cash you have and how it was spent.

This post is just a brief overview. Each statement has much more to information, and I will explain details later.