As training professional for more than 25 years, I’ve observed that without basic financial acumen, employees fail to recognize their own role in maintaining a company’s solvency. Publicly traded companies typically publish three key financial documents: Income statement, balance sheet, and cash flow statement. These documents are typically produced by accountants who abide by Generally Accepted Accounting Principles.Educate your teams on these documents to ensure they understand what makes your company work.
Most companies use accrual accounting, which means that income and expenses get recorded when they happen as opposed to when they finally are received or paid. So, revenues are recognized during the time period in which the sales activities occurred.
The income statement , also known as a profit-and-loss statement, shows if a company is making a profit. By reviewing monthly, quarterly and year-to-date summaries of a company’s operations, you can also determine how much money the company spends to make its profit, known as profit margins.
A balance sheet uses double-entry accounting. This ensures that each transaction balances and assumes that assets minus liabilities equals the owner’s equity. Assets are the things the company has so it can conduct business, such as buildings and equipment. Money owed to creditors is a liability.
Cash Flow Statement
A cash flow statement functions like a person’s checking account. It lists how much cash was on hand at the start of a period and how much was available at the end of that period. It also describes how money was spent. So, this statement allows you to see where the company’s money flows into and out from the company.
Sometimes you need to dig deeper into information. Ratio analysis allows you to examine two key numbers in relation to each other. Calculate return on assets first. Divide net income by assets. Next, determine return on equity. Divide net income by the owner’s equity. Return on sales is figured out by dividing net income by total sales revenue. Calculate gross margin. Subtract your total cost of goods sold from your sales. Divide that by sales. These profitability ratios help you determine a company’s financial health. It can also reveal inefficiencies that can be addressed by changing policies, personnel or operational procedures.