Understanding Financial Statements

The Santa Clarita Valley Business Journal

Steve Nuñez, Vice President,  Relationship Manager, Mission Valley Bank

Small businesses — companies with less than 100 employees — account for 99.7% of U.S. businesses. Only 7-in-10 small businesses survive their first year, with nearly one-third of business owners citing cash flow problems as the catalyst forcing them to throw in the towel. 

Managing your company’s finances requires understanding them. A financial statement has three main parts: balance sheet, income statement and cash flow statement. When viewed together, the balance sheet and income statement represent a complete financial picture of the company.  They serve as an invaluable tool in the management and planning of any business providing clear, concise, decision-relevant information.

A balance sheet shows what a company owns and owes. It presents a company’s financial position at the end of a specified date giving a snapshot of a company’s assets, liabilities, and owners’ equity. 

The income statement shows the company’s profitability in how much revenue a company earned over a specific time period and its expenses. 

The cash flow statement reports the company’s inflows and outflows during a period of time. A company can be profitable, but still experience cash flow difficulties if money is not coming in fast enough making it difficult to meet short-term liabilities.

To evaluate the financial management of your company, start by carefully reviewing financial goals and trends then determine what action is needed. Consider these steps to be better prepared to make critical decisions.

Gather the last three years of your financial statements.

Put the data in a spreadsheet, placing consecutive years in side-by-side columns.

Calculate your financial ratios to focus on the relationship between the numbers as opposed to the raw data.

Compare financial performance to peers.

Look at the changes and trends comparing the business against prior years, industry standards, and future plans.

Analyze the data, identifying problems and developing solutions.

Take action. Formulate a plan, implement the plan, and monitor the results.

If you need assistance, a good place to start is with your network of trusted advisers, which should include a relationship banker. 

Steve Nuñez is the vice president and relationship manager at Mission Valley Bank, a locally owned, full service, independent community business bank with Preferred SBA Lender status serving the San Fernando and Santa Clarita Valleys. Steve can be reached at (661) 753-5681 and by email at SNunez@mission
or at www.
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