“Every picture tells a story. But sometimes it's hard to know what story is actually being told.”
Anastasia Hollings, Beautiful World
I’m sure you’ve heard the quote, “Every picture tells a story.” But do you know the next line? It reads, “But sometimes it’s hard to know what story is actually being told.” I like that. It reminds us that there is more to know. And the more we know about the picture, i.e., background, context, characters, the more likely we are to interpret the story correctly.
Financial statements are like a picture of your company. And if you know how to read these statements, the more likely you and others are to interpret your company’s story correctly. Once you know your company’s story, the easier it is to predict the future and even change the story if necessary.
Generally speaking, there are three types of statements - the balance sheet, income statement and cash flow statement. If we want to carry the story analogy further, the balance sheet is the lifetime story of the business and the income statement is the current story.
The balance sheet shows what a company owns (assets) and owes (liabilities) at a particular point in time. It shows how well a company is using its resources, in the form of assets and debt, to generate income.
The income statement focuses on a company’s revenues and expenses over a range of time and usually includes data from the previous year for comparison. It shows whether or not a company is profitable over a specific period of time.
All three financial statements provide important insights into your company, and when analyzed together, help tell the bigger story.
Are your financial statements telling the story you want? Are you reading the story accurately?
Contributed by Managing Partner, Ryan Hood