Oana Labes, MBA, CPA’s Post

The key to understanding anything critical or otherwise about the strengths or challenges of an organization.

As an Accountant, it's our role to prepare the Company Financial statement and here is how the three are connected for the top management sound decisions making and strategic planning

How to read a financial statement? Financial statements aren't hard. Let me break down how to analyze: • Balance Sheets • Income Statements • Cash Flow Statements In under 3 minutes: 1. The balance sheet shows what a business has and owes at any moment. 2. The income statement shows how profitable the company was over time. 3. The cash flow statement shows the actual cash going in and out of the business. 1. The Balance Sheet: Answers the question, "What does the company have, and what does it owe?" A balance sheet is a snapshot of a company's financial position at a specific point in time. It shows: • what a business owns (assets) • what it owes (liabilities) • what belongs to the owners (shareholder equity) The key thing to know is that a balance sheet follows the simple formula: Assets = Liabilities + Shareholder Equity 1a. Assets = Liabilities + Shareholder Equity: This makes sense when you think about it - a company has to finance or pay for its assets by taking on debt (liabilities) or getting investments from shareholders (equity). Analyzing a balance sheet can show you: • how financially stable a company is • how much debt it has • the company's ability to grow and take on more opportunities 2. Income Statements: It answers the question, "How much money is the company making?" While a balance sheet shows a company's financial position at a point in time, an income statement shows performance over a period of time. It summarizes how much money a company brought in (revenue) and how much it spent (expenses) over time. 2a. The key parts of an income statement are: • Revenue - Money earned from sales of products and services • Expenses - Operating costs like employee salaries, materials, advertising, etc. • Profit/Loss - Revenue minus expenses gives you your final profit or loss 2b. An income statement helps you understand how profitable a company's operations are. • Are sales growing or declining? • Are expenses under control? These questions can be answered by analyzing trends in the income statement over time. 3. Cash Flow Statements: It answers the question, "How much money is the company generating, and how is it spending it?" Cash flow statements show how cash enters and leaves a business through three main activities: • Operating activities - Cash from day-to-day operations and expenses • Investing activities - Cash used for investments and asset purchases • Financing activities - Cash from loans, investors, stock issuances 3a. While income statements show profitability, cash flow statements depict liquidity - a company's ability to generate cash and meet financial obligations. Positive cash flow indicates financial health and flexibility to pursue new projects or investments. Hope it helps, thanks Cheers

4 STEPS TO DETERMINE THE FINANCIAL HEALTH OF BUSINESS 1. Analyze the Balance Sheet The balance sheet is a statement that shows a company’s financial position at a specific point in time. The balance sheet provides information on a company’s financial health by helping you analyze the following: ➡ How much debt the company has relative to equity ➡ How liquid the business is in the short term (less than one year) ➡ What percentage of assets are tangible and what percentage comes from financial transactions ➡ How long it takes to receive outstanding payments from customers and repay suppliers ➡ How long it takes to sell inventory the business keeps on hand 2. Analyze the Income Statement The income statement shows a company’s financial position and performance over a period by looking at revenue, expenses, and profits earned. The income statement provides information on a company’s financial health by helping you analyze the following: ➡ How much revenue is growing over certain accounting periods ➡ The gross profit margin for goods sold ➡ What percentage of revenue results in net profit after all expenses ➡ If the business can cover its interest repayments on debt ➡ How much the business repays to shareholders versus how much it reinvests 3. Analyze the Cash Flow Statement The cash flow statement provides detailed insights into how a company used its cash during an accounting period. The cash flow statement provides information on a company’s financial health by helping you analyze the following: ➡ The liquidity situation of the company ➡ The company’s sources of cash ➡ The free cash flow the company generates to further invest in assets or operations ➡ Whether overall cash has increased or decreased 4. Financial Ratio Analysis Financial ratios help you make sense of the numbers presented in financial statements, and are powerful tools for determining the overall financial health of your company. Ratios fall under a variety of categories, including profitability, liquidity, solvency, efficiency, and valuation. Some of the financial ratios you should know include: ➡ Gross profit margin: The percentage of profit the company generates after direct cost of sales expenses have been deducted from the revenue ➡ Net profit margin: The percentage of profit the company generates after all expenses have been deducted from revenue, including interest and tax from revenue ➡ Current ratio: The company’s ability to meet short-term obligations of less than one year ➡ Debt-to-equity ratio: The percentage of debt versus equity that the company uses to finance itself ➡ Inventory turnover: How many times per period the entire inventory was sold Understanding the financial health of a company is critical for all professionals. By analyzing the information in financial statements, you can learn about your company’s fiscal health and turn insights gleaned from data into actions that benefit your business and career #business #finance #accounting

The Balance Sheet is the most valuable Financial Statement, yet most businesses ignore them. Here is what the Balance Sheet teaches you and how to analyze it: The Balance Sheet formula is: Assets = Liabilities + Equity Rework that formula and you get Assets - Liabilities = Equity What you own - what you owe = book value of the business. In this way, it’s answering the question, is this business healthy? A book value < 0 = Accounting Insolvency But Accounting Insolvency is just a book number; you might still be able to meet your obligations with cash flows. Good? No… but not cash flow insolvency, where you can’t meet your short or long-term obligations. The Balance Sheet is broken into 3 sections: • Assets: what you own • Liabilities: what you owe • Equity: the difference Both Assets & Liabilities are further broken down into short-term (less than year) or long-term (more than year hold or maturity). The Equity section is broken into these components: • Common stock (initial capital investment) • Owner’s contributions • Owner’s distributions • Retained earnings • Current Year Net Income Current Year Net Income from the Income Statement shows up in the equity section. Every year, that balance is zeroed out and rolled in Retained Earnings, which is a reflection of historical earnings of the business. To analyze this statement, you’re going to do two types of analysis: • Horizontal • Ratio Horizontal Analysis is looking at the change between a past period and the current period. That can be past month, quarter, or year. With Ratio Analysis, you’ll look for benchmarks as well as trends. Some common types of ratios are: • Liquidity Ratios These ratios measure your ability to turn assets into cash. Some favorites are: - Current Ratio or Quick Ratio - Cash Burn Rate / Cash Runway - Cash Conversion Cycle • Solvency Ratios These ratios show your ability to pay-off debts. Some common ones are: - Debt-to-equity Ratio - Interest Coverage Ratio - Debt Service Coverage Ratio • Return on Ratios These tell you what your return on investment is. Trying to use your assets efficiently? Use Return on Assets (ROA) Looking to measure financial efficiency compared to competitors? Return on Equity (ROE) Wonder how efficiently you’ve deployed investor capital? Return on Invested Capital (ROIC) Want to understand how well current capital is utilized (especially in capital-intensive industries)? Return on Capital Employed (ROCE) You should NEVER use all of these ratios. Choose the specific analysis tools that are best for your business and watch: • trends • thresholds When a trend turns bad or a threshold number is broken, dive deeper and determine why. Thanks for reading! If you’re a business owner and want to be able to use your financials as a decision-making tool, check out my cohort (it starts March 11th): https://lnkd.in/gXMntDyz

Balance Sheet !

Overview of Balance sheet

 💡 Understanding of 4 Crucial Financial Metrics Gross Profit vs Net income vs EBITDA vs Cash Flows Created by Josh Aharonoff, CPA Gross Profit, Net Income, EBITDA, and Cash Flows are important financial metrics that provide valuable insights into the financial performance and health of a business Here are what you should know about these metrics: 1️⃣ GROSS PROFIT ➡️ What it means ▪️ The amount that’s left over from your revenue after you subtract the cost to deliver your product or service ➡️Where it’s found ▪️ The Profit & Loss ➡️ What’s the formula ▪️ Revenue - COGS ➡️ Why it's important ▪️ It helps you understand the maximum amount of money your business can earn - if you have a negative gross profit, you don’t have a business! 2️⃣ NET INCOME ➡️ What it means ▪️ The net profitability of your business for a specific period of time - IE all income less all expenses ➡️ Where it’s found ▪️ The profit & Loss ➡️ What’s the formula ▪️ Revenue - COGS - Operating Expenses + Other Income - Other Expenses ➡️ Why it's important ▪️ This is the ultimate number that you are generating in profitability from your business - if you keep posting losses, you will need to raise capital to sustain your operations 3️⃣ EBITDA ➡️ What it means ▪️ Earnings before Interest, Tax, Depreciation, and Amortization ➡️ Where it’s found ▪️ No where - it’s compiled separately and is a non GAAP Metric ➡️ What’s the formula ▪️ Net Income + Interest Expense - Interest Income + Taxes + Depreciation + Amortization ➡️ Why it's important ▪️ Many feel that EBITDA is a good approximation for cash flows. It is also commonly used to value businesses 4️⃣ Cash Flows ➡️ What it means ▪️ How much cash went in and out of your bank account ➡️ Where it’s found ▪️ The Statement of Cash Flows (or by taking the ▲ in cash on your balance sheet) ➡️ What’s the formula ▪️ Cash from Operating Activities + Cash from Investing Activities + Cash from Financing Activities (Or ending cash - beginning cash) ➡️ Why it's important ▪️ Cash is king - you can have the most profitable business in the world, but if your expenditures keep outpacing your receipts, you’ll have to raise capital to sustain your operations ---- 🗣 It is a controversial topic as to which of these metrics is the most important one! A group of professionals thinks NET INCOME is the most important one as it directly reflects profitability and shareholder value. On the other hand, another group believes GROSS PROFIT is more important as it helps you to keep your business alive. ⁉️ What is your opinion? Let's discuss it in the comments. 👇

Ever wonder why some businesses thrive while others barely survive? The secret is in their cash flow management. Happy #ForwardlyFriday #Accountants & #SMBs🥳 Unveil the power of a cash flow budget and set your business apart from the rest. 🔗:https://bit.ly/3SZwTyG #RTP #BusinessFinance #FedNow