{"id":238,"date":"2021-06-06T15:30:59","date_gmt":"2021-06-06T15:30:59","guid":{"rendered":"https:\/\/www.forwardai.com\/blog\/?p=238"},"modified":"2022-12-22T04:49:05","modified_gmt":"2022-12-22T04:49:05","slug":"5-stories-your-financial-statements-tell","status":"publish","type":"post","link":"https:\/\/www.forwardai.com\/knowledge-center\/blog\/5-stories-your-financial-statements-tell\/","title":{"rendered":"5 Stories Your Financial Statements Tell"},"content":{"rendered":"\r\n
\"Financial<\/figure>\r\n\r\n\r\n\r\n

For some entrepreneurs, putting together your financial statements can seem like busywork. You have a business to run, so can\u2019t your accountant just whip up what you need and send it off wherever it needs to go? Theoretically, sure. But the most forward-looking business owners understand that doing the numbers isn\u2019t just perfunctory.<\/p>\r\n\r\n\r\n\r\n

That\u2019s because your financial statements tell very specific stories about your business. What they say could have a big impact have on your company\u2019s cash flow and future. But, it all depends on who\u2019s looking, and, of course, the numbers themselves.\u00a0(See what kind of stories unfold with ForwardAI\u2019s\u00a0cash flow forecasting<\/a><\/strong>.)<\/em><\/p>\r\n\r\n\r\n\r\n

The first 3 chapters in your financial story<\/strong><\/h2>\r\n\r\n\r\n\r\n

We\u2019re not talking about just any financial information. We\u2019re talking about three business financial statements very specifically \u2014 what we at ForwardAI (and most everyone else) look at as the accounting trifecta. Together, the income statement, balance sheet, and cash flow statement give the full picture of how your company is performing financially.<\/p>\r\n\r\n\r\n\r\n

Income statement<\/strong><\/h3>\r\n\r\n\r\n\r\n

If you\u2019ve never heard the term \u201cincome statement\u201d or \u201cstatement of income,\u201d then you\u2019ve probably heard \u201cProfit & Loss\u201d (or just \u201cP&L\u201d). Whichever term you know, they all mean the same thing.<\/p>\r\n\r\n\r\n\r\n

Your income statement is the first massively important document in the trifecta. Briefly, it shows you whether or not your business is making a profit. It also reveals where you\u2019re earning and where you\u2019re spending \u2014 and, naturally, whether you\u2019re spending more than you\u2019re earning.<\/p>\r\n\r\n\r\n\r\n

That alone can tell a story, but what\u2019s especially notable about your P&L is that it tracks data over a specific period of time. Many business owners do them quarterly, and, at a minimum, yearly. Some even choose to draw up an income statement every month to be able to get a more consistent pulse on trends.<\/p>\r\n\r\n\r\n\r\n

Balance sheet<\/strong><\/h3>\r\n\r\n\r\n\r\n

Next up is your\u00a0balance sheet<\/a><\/strong>. Like your income statement, this also has another name \u2014 the \u201cstatement of financial positioning.\u201d It centers on a simple but telling equation to allow you to see your business\u2019s net worth:<\/p>\r\n\r\n\r\n\r\n

Assets = Liabilities + Equity.<\/p>\r\n\r\n\r\n\r\n

In contrast to the P&L, your balance sheet looks at a specific moment in time. This is an important difference when you\u2019re thinking about the stories that your accounting documentation tells, especially because circumstances change so rapidly in business. Due to\u00a0accounts receivable<\/a><\/strong>\u00a0and payable, among other factors, how your finances look on one given day can \u2014 and likely will \u2014 be very different compared to another. Even if it\u2019s just a week later.<\/p>\r\n\r\n\r\n\r\n

Cash flow statement<\/strong><\/h3>\r\n\r\n\r\n\r\n

Rounding out the three, your\u00a0cash flow statement<\/a><\/strong>.\u00a0(And, our personal favorite at ForwardAI. Because, absolutely, we have a favorite financial statement.)<\/em>\u00a0Your cash flow statement \u2014 or \u201cstatement of cash flows\u201d \u2014 shows the movement of cash into and out of your business. That includes your investments, operations, and any financing you have, too.<\/p>\r\n\r\n\r\n\r\n

We mention cash flow last certainly not because it\u2019s least. Far from it \u2014 in fact, most small businesses\u00a0fizzle<\/a><\/strong>\u00a0due to poor cash flow management and the subsequent lack of capital. Rather, it\u2019s important to understand your P&L and balance sheet first because your cash flow statement ties directly into numbers that appear on both. It pulls from amounts on each. It also supplements them with additional insights.<\/p>\r\n\r\n\r\n\r\n\r\n\r\n

What your financial statements reveal<\/strong><\/h2>\r\n\r\n\r\n\r\n

Alone, your three financial statements certainly help you get a picture of how your business is doing. But it\u2019s sort of like reading through a book without vowels. You can get through the story, but the words are incomplete. Plus, you won\u2019t understand how the writer intended you to get through the book. You miss the insight into the language that having every last letter provides.<\/p>\r\n\r\n\r\n\r\n

And there are a lot of stories hidden in your accounting documentation! You\u2019ll want to make sure you understand what some of the most important big ones are saying about your company.<\/p>\r\n\r\n\r\n\r\n

1. How well you budget your cash flow<\/strong><\/h3>\r\n\r\n\r\n\r\n

Since\u00a0cash flow<\/a><\/strong>\u00a0is a big component of all three of your statements, you\u2019d likely expect that you can gather a lot about your business\u2019s cash flow when you look at all of them. What you can especially see? If you\u2019re good with that cash. Which, as we mentioned before, is a major part of your company\u2019s likelihood of survival.<\/p>\r\n\r\n\r\n\r\n

Among the things those evaluating your cash position will be able to see are:<\/p>\r\n\r\n\r\n\r\n