The Biz of Pacelinebiz

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Understanding Financial Statements

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More Information Needed

More Information Needed

Today’s topic will be a brief lesson about understanding financial statements.  What does the chart above tell you?  Not much.  In fact, it tells you that you need more information to make a decision about its significance.

I was recently a speaker at a Business Education Seminar and spoke about Understanding Financial Statements for the small business owner.  I thought I would share a few bullet points from that presentation.

  • Sales – cost of goods sold – operating expenses = net income or loss.  That is third grade arithmetic and is only half the story.
  • Knowledge and understanding of the information is what is important – not just the numbers
  • Making informed decisions based on your knowledge and understanding of the information is what is most valuable
  • You need to have a year over year comparison for your financial statements and 5 years of data is good for trend analysis

Understanding financial statements can be compared to reading versus comprehension for example:

Person 1 read a book and gave this report:
It is a book about a pig and a spider that can write words in her spider web.”

Person 2 read a book and gave this report:
It is a story of a spider, aided by a rat, and they’re working to save Wilbur the pig from the reality of every working barn. Its message is; kind people can be ugly and sometimes cruel, others can be greedy but helpful, snooty but caring. The world can be harsh but also beautiful and warm. It’s a lovely fantasy grounded in reality.”

Which person “got it”? (Reading vs. comprehension)

Let’s take a look at the rest of the story from the chart above and you will immediately see my point.  Look what happens after period 12.  Have a great week digging deeper into understanding your financial statements to manage your business.

The Rest Of The Story

The Rest Of The Story

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Written by pacelinebiz

September 16, 2013 at 8:01 am

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