Company financial reports are the report card for your company, and as such, they paint a picture of the financial health of your business. They are so significant they should be at the top of your monthly list of readings.
These reports guide about the annual taxes. They inform your lender if you have the money to apply for the loan. Above all, company financial reports are a reflection of the performance of your company.
The three most common company financial reports are the Report of Profit and Loss, the Balance Sheet, and Cash Flow Statement.
● Profit and Loss report displays the revenue earned and expenditures incurred over a certain period.
● Balance Sheet offers a snapshot of the financials at a given time of your business.
● Cash Flow Statement shows how much cash will be generated and used during a given period.
Let's explore three of them in depth.
Profit & Loss Report
Profit and Loss report show you money coming in and out of the bank, and what has leftover afterward. This report shows all incoming revenue and expenditures that have been charged or incurred. This report takes no account of how much money you have in savings or even your bank balance.
The report then records overall (gross) income from all sources and total expenses paid over the same period. If you deduct total expenditures from total revenue, the outcome for that time is Net Profit or Loss.
Let's understand this report with an example:
● Revenue:
(+) Annual Financial Planning Fees
(+) Detailed Strategy Fees
(+) Investment Consulting Fees
(-) Selling Costs*
=Gross Profit
*Sales or Cost of Goods Sold shall be used to identify direct costs affecting the delivery of the service or the product produced. Service-oriented companies do not often use that, but that would be used by some RIA's to disclose the Officer Salary.
(+) Advertising/marketing
(+) bank charges
(+) company meals
(+) education and training
(+) insurance
(+) interest charges
(+) legal and technical services
(+) office charges
(+) payroll
= Full Overhead (Total Expenses)
Net Profit = Gross Profit – Total Expenses
With the help of company financial reports on Profit & loss, you will note that there are no payments on the principal amount of a loan. The repayment of debt is not considered an expense for the company. Debt repayment is more of an internal transfer.
Balance Sheet
The Balance Sheet gives a snapshot of company financial reports what are held (accounts), what is owed (liabilities), and what remains (net value). The balance sheet accounting equation is the Equity of Assets = Liabilities + Shareholders.
Assets are the inventory of products owned by a company— tangible and incorporeal. Liabilities are what the organization owes in debts, either in the short or long term. Shareholders' equity is the amount paid by the owner or shareholders, or the retained earnings, which is the sum that a business holds over its previous years' net income.
Let's understand this with an example:
Assets
1. Current Asset:
● Checking Assets
● AUM Profit
● Accounts Receivable
● Undeposited Funds
● Prepaid Expenses
2. Fixed Assets:
● Goodwill
● Vehicles
● Buildings
Current Assets + Fixed Assets = Liability + Equity = Total Assets
Liabilities
1. Current Liabilities:
● Credit Cards
● Employee benefit Payables
● Short term debt
● Accounts payable
2. Long-Term Liabilities:
● Vehicle
● Land / Construction Loans
3. Equity:
● Owner / Shareholder / Partner's Contributions
● Retained Earnings
Reading your balance sheet will help you answer questions like my company has too much debt, or do I take too much in distributions? However, if your state requires a minimum amount of dollars in assets, then reading the report is crucial.
Cash Flow Statement
The Cash Flow Statement indicates how much cash is generated and used during a given period. It is composed of three categories:
● Operational activities
● Investment activities
● Financing activities
Whereas the Profit and Loss report contains a depreciation allowance and does not include the principal payments on a loan, the Cash Flow Statement represents the actual money movement.
The Cash Flow from Operating activities ends with the Profit and Loss Statement net income or loss. It adds in Depreciation & Amortization as these things do not affect the actual cash in the company.
The investing activities track improvements in capital expenditures and long-term investments, such as buying land or other companies. These investments cause the movement of money from the business and are subtracted from the net income.
The cash flow from Financing Activities includes the purchase and sale of assets and changes in long-term liabilities as well as the equity of the owners, owner, partner included on the balance sheet. If your business borrows money, the borrowed capital increases the cash inflow and thus raises net income. The payments on this loan are deducted from the net income.
Depending on only one of the three major company financial reports, you'll get an incomplete and misleading image of the financial health of your business. Alternatively, you should use your Balance Sheet, Profit and Loss Statement, and Cash Flow Statement together to get the most comprehensive understanding of how financially your company is doing.
