Gold has value because of its beauty and rarity. Your own business has value because of its profitability, cash flow, and potential for future wealth. The value of a company is communicated through its financial statements. Reading financial statements can be very frustrating until you learn the secret. Financial statements are not meant to be read word-for-word, or even from beginning to end.
The financial story can be read many ways. By comparing the balances of a few key financial statement accounts, you will learn a great deal about your business. To learn more of the story, you need to look closer at how account balances have changed over time. Financial ratios are a valuable tool many entrepreneurs use to get a closer look at a business’s financial performance.
You should read and understand your three main financial statements, Income Statement, Balance Sheet, and Cash Flow Report. No one statement is more valuable than the others. Together they tell the story of your business. Your job as the entrepreneur is to gain a better understanding of how to read your business’s financial story.
As you are reading your own financial statements, you should be reviewing financial numbers and using ratios to analyze the information. Ratios are mathematical comparisons of one number to another. After the analysis, you should identify key financial strategies that will improve your business’s financial success story.
Get Started
As you are reading to understand your own financial statements, you will want to have the right information easily accessible. First, you will need your own financial information. You will also want financial information from other companies in your industry and may want to have a financial glossary, and a financial statement guide handy to help explain concepts that are unfamiliar.
Gathering Company Information
Use the following financial statements to analyze your financial performance.
- Income Statement
- Balance Sheet
- Monthly Cash Flow Report
- Ratio Analysis
Collecting Industry Information
Financial research provides the information you need to compare your financial information with other companies. Most industry figures are broken down into categories based on the size of the company. This breakdown will help you identify ratios and financial numbers that are the most realistic for your business. For example, you may be able to identify that rent expense should be about six percent of your sales by reviewing industry information.
Much financial information can be found online or at your local library. By using the NAICS or SIC classification codes, you can find information about business profits, expenses, or other financial data. Look for the following:
- Trade associations often provide industry and competitor information concerning financial trends, industry sales, and expenses.
- Magazine and periodical databases, available at most libraries, provide additional industry information.
- Financial statement studies, available at most libraries, provide valuable financial data about companies arranged by industry and size.
- The Internet makes a multitude of information available for publicly traded companies, including those regulated by the Securities and Exchange Commission (SEC). Numerous sources provide private company information, industry information, and financial ratio analysis, sometimes for a fee.
Just as no two businesses are exactly alike, you will likely notice a discrepancy between the information you find and the information you need. For example, some information will have one or two of the ratios that you are looking for. Other information will have a few financial numbers but no ratios. With a little effort, you will be able to compile the needed information by combining resources.
Try the following searches to identify information for your industry. Add your own industry classification, NAICS or SIC code, to the search for added specificity. Or combine the following search titles to reduce the number of hits:
- Industry analysis
- Industry reports
- Financial ratios
- Industry and financial ratios
- Ratio analysis
- Industry briefs
- Industry guides
- Business profiles
Learn more about the Art of Startup Finance on Kauffman Founders School >