The Complete Financial Picture

When I started my career in commercial banking, one of the first things I learned was how to analyze financial statements. Once the accountant prepares financial statements, the bank uses them to determine the financial health of the business.

It is important to look at the complete financial picture whether you are running a business or investing in a company. A complete financial picture includes the balance sheet, income statement, and statement of cash flow. Each of these statements serve a purpose and tell a story. 

Many businesses/investors focus solely on the income statement. They may look at revenue growth trends, net income, earnings per share, EBITDA, and profit margins. While this information is important, it tells you very little about the assets, liabilities, net worth, and the cash flow of a company.

The balance sheet serves as a useful tool as it provides a snapshot of a company’s resources (assets), a company’s obligations (debt and other liabilities) and owner’s equity. An investor/lender can analyze the balance sheet to determine a company’s working capital and balance sheet leverage (debt-to-equity). The balance sheet essentially shows how much a company is worth. 

It is especially important to understand the debt of a company in a rising rate environment. Banks often perform stress tests on their borrowers to determine their ability to service debt as interest rates rise and revenue/income decline.

The third financial statement is the statement of cash flows. The cash flow statement performs as a bridge between the balance sheet and the income statement. It shows how the money moved in and out of the business. It measures how well the company generates cash to fund its expenses. The cash flow statement is broken down into three sections: operating activities, investing activities, and financing activities.   

When we pull these three financial statements together and analyze them, we can calculate many ratios that show how well a company manages itself. Business owners can use financial statements to obtain funding, create a plan for growth, or even create a survival plan in the event of a recession. 

To learn more about LonaRock, LLC and our business finance consulting services, please visit our website at www.lonarock.com or contact us directly at 234-217-9033.  We look forward to helping you reach your financial goals and helping you obtain the best possible financing for your company.