Top tips for understanding your financial statements
A financial statement is an extensive report of your financial activities, either as an individual or an organization. Understanding them is key to making informed decisions that benefit your financial security.
Financial statements can be complex. There’s a lot to break down, so in this guide, we share an in-depth overview of the kinds of financial statements, as well as a few top tips for understanding them.
Personal financial statements
Personal financial statements are generally simpler than business financial statements, but they still offer an in-depth breakdown of a person’s overall financial situation.
What do they include?
Your personal financial statement will contain your assets and liabilities – by subtracting your liabilities from your assets, your overall net worth is determined.
Assets include savings, real estate, trading accounts and retirement account balances. Your liabilities are any debts you own, such as personal loans and credit cards, mortgages and unpaid bills. If you have more liabilities than assets, your overall net worth will be negative. If you have more assets than liabilities, you’ll be left with a positive net worth.
What else is included in your personal financial statement usually depends on your reason for obtaining it. For example, if you need one for the purpose of attaining credit, your income and expenses may also be included – although, these are often listed on a separate document, called an income statement.
What are they used for?
Personal financial statements provide you with a comprehensive picture of your overall financial health. They can help you to gain a better understanding of your activities and habits, which can be useful for keeping on top of any issues and working towards financial goals. Having one can also help you avoid credit checks that have the ability to negatively impact your credit score – they essentially offer extra transparency that can help you to make smarter money decisions.
Business financial statements
Business financial statements contain an overview of a business’s financial activities to determine its condition and profitability.
What do they include?
At their most basic, business financial statements will include a balance sheet, income statement and statement of cash flows. However, they may also include information on changes in shareholder equity, a statement of comprehensive income, and a nonprofit financial statement.
Just like a personal financial statement, a business financial statement contains a company’s assets and liabilities. These are included in the balance sheet, along with a breakdown of shareholders’ equity. Assets include cash and cash equivalents, accounts receivable, inventory, prepaid expenses, property and equipment, investments, and any intangible assets. Liabilities include a company’s accounts payable, wages, notes payable, dividends, and long-term debts, such as mortgages. A company’s total assets minus its liabilities equal the shareholders’ equity – it represents the amount of money that would be returned to shareholders if the company were to go into liquidation.
The income statement provides information on a business’s revenue, expenses, net income and earnings per share. It can be a good indicator of a company’s overall profitability and financial performance over a long period of time.
The cash flow statement shows the movement or ‘flow’ of cash throughout a business. It includes a company’s operating activities (any cash made from a business’s running operations such as inventory and wages), its investment activities (such as purchase or sale of an asset) and its financing activities (such as cash from loans, cash paid to shareholders, and debt repayments).
What are they used for?
Business financial statements are very comprehensive as they are often used in government audits – they may be used to ensure tax accuracy or for financing or investing purposes. Just like personal financial statements, they can also be useful to professionals who need an in-depth understanding of the company’s finances in order to crack down on any discrepancies or strategize for financial growth.
How to better understand your statements
Business financial statements are usually prepared by a team of accountants or financial analysts who are able to interpret complex stored company data. Their aim is to make the company’s financial activities easy to understand for stakeholders, investors and lenders. Communicating with your finance team is key to gaining a better understanding of each section of your financial statements.
Personal financial statements will generally be much easier to understand and interpret. Because they’re personal to you, you should already be fairly familiar with the trends and patterns you’re likely to encounter once your statement has been generated.
For the most part, your personal financial statement will only need to be interpreted by those you’re supplying it to, such as credit agencies. But if you want a better understanding of the information included and its implications, it’s worth speaking to a financial advisor.
Financial statements serve many purposes, and in business, having professionals to generate them is essential. Personal financial statements are equally important in proving your financial stability, whether you choose to generate one yourself, or have a professional create one for you.
