Understanding your Financial Statements

Back to Basics: Top 3 Key Elements to Focus on in Your Company’s Financial Statements
Understanding your company’s financial statements is crucial for making informed business decisions. Here are the top three areas you should focus on to get a clear picture of your financial health:

1. Assets and Liabilities
Assets represent the resources your company owns, which can either be turned into cash (such as inventory or accounts receivable) or generate future cash flow (like property and equipment). Essentially, these are the tools that help drive your business forward.

Liabilities, on the other hand, are obligations that the company must eventually pay. This includes debts such as accounts payable or loans, which will use up cash in the future.
A good rule of thumb: If your short-term assets exceed your short-term liabilities, your business will likely be able to meet its immediate financial obligations and continue operations smoothly.

2. Gross Profit
Gross profit is a key indicator of your company’s core profitability. It’s calculated by subtracting the Cost of Sales (what it costs to produce or buy the products you're selling) from Sales (your revenue).
For instance, if you buy a product for $10 and sell it for $25, your gross profit is $15. This profit needs to be large enough to cover all your operating costs, such as rent, utilities, and salaries, and still leave something left over as net income.
If your gross profit isn't sufficient, it will be difficult to maintain profitability in the long term.

3. Net Income
Net income is what’s left after deducting all operating expenses from your gross profit. It represents the company’s bottom line – the true profitability of your business. You can calculate this figure before or after taxes, but post-tax net income gives a clearer view of the money available for reinvestment or distribution to shareholders.
A positive net income means your company is making more money than it's spending, a critical measure of financial success.

By focusing on these three components—assets and liabilities, gross profit, and net income—you'll have a solid foundation for evaluating your company’s financial performance. Understanding them will help you make smarter, data-driven decisions to guide your business toward growth and profitability.
 
​Reach out if you have any questions, or would like a second opinion on your company's financial statements.