How do the Financial Statements Tie in With One Another?

Whether or not you handle your own bookkeeping, you’re likely familiar with the three main financial statements – the Balance Sheet, the Income Statement and the Statement of Cash Flows. To have a full picture of your business, it’s important to review all three of these at least once a month. (Refer to our blog for more information on each.)

Here is a quick recap of what each one covers:

  • The Balance Sheet lists out your assets (what you own), liabilities (what you owe), and what’s left over (equity).
  • The Income Statement lists out your income, expenses, and the final result (either a profit or loss).
  • The Statement of Cash Flows lets you know where your cash came in from and where it went.

When running the above reports over a comparable period of time, the numbers should all fit in for one another. For example, the net income amount will show the same number on the Balance Sheet, Income Statement, as well as the Statement of Cash Flows. Another example is when looking at your cash amount, your Balance Sheet should show the same number as your Statement of Cash Flows.

Each report has a different purpose – thus the importance of reviewing each and seeing how they tie into one another. By having the full picture of your business, you’ll be able to make decisions for your business that make the most sense and produce the best outcome.

How can you use these reports to help you with your business? Once you have your reports prepared for the month (or by your bookkeeper or accountant), you should start with the Balance Sheet. Ideally, you’d do this as soon as possible into the new month, so that the information is as fresh as possible.

Some points to consider and questions to ask yourself when reviewing the Balance Sheet are:

  • How much cash do you have, between all bank accounts? How does this stack up to your monthly expenses?
  • If your business tracks inventory, look at how much inventory you have on hand. You don’t want to have too little on hand, but at the same time you don’t want to be overstocked as this ties up cash flow.
  • Accounts Receivable: If your business delivers services before payment, you’ll want to keep a close eye on this account. More detailed reports can be run on this account, showing you how long which customers have owed you and for how much. Sales are important, but if you’re not collecting the cash, it’s going to cause problems for your business.
  • Credit Cards and Loans: How much do you owe? If your business has too much debt, it’s going to be hard to keep up with payments and will hurt your cash flow.

Once you’re done reviewing your Balance Sheet, the next financial statement to review is the Income Statement. This report lists out your income and expenses.

Some points to consider on this report are:

  • Where are you getting your sales from?
  • What are some of your larger expenses?
  • Is there any spending for the month that looks unusual?
  • Are there any expenses that are unnecessary?
  • What were your overall profits or losses?
  • How does this compare to previous months or years?
  • How much profit are you making as an overall percentage?

The third financial statement to review will be the Statement of Cash Flows. This report will start out with your net income, and from there will break down actual cash differences (plus or minus).

Some examples could include:

  • Paying for things on a credit card will show a positive cash difference.
  • Paying down a credit card will show a negative cash difference.
  • Taking a loan will show a positive cash difference.
  • Having payments in Accounts Receivable still needing to be collected will show a negative difference.

As you can see with the Statement of Cash Flows, all it’s showing are the cash differences, whether they’re positive or negative. It’s important to not think of the numbers on this report as profit or loss, as that’s not exactly what they’re communicating. This is a separate and distinct report giving its own set of numbers and information.

The more practice you get with these reports, the more they’ll make sense! If you handle your own bookkeeping and accounting, make sure to review them all each month. If you outsource your bookkeeping, make sure to go over these reports each month with your bookkeeper or accountant, to get their insight as well! 

If you are otherwise looking for a bookkeeper, feel free to contact us for a consultation!

Do you have any questions, comments or feedback? Email us at contact@lucrativebookkeeping.com.

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