The balance sheet and income statement of an enterprise highlight different aspects of a company’s financial history. Together they tell a complete story of an organization’s financial position.
Your business’s financial position cannot be described without reference to these financial statements.
The Balance Sheet is referred to as a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time (A snapshot). It provides a snapshot of what an organization owns and owes as much as the amount invested by shareholders. The balance sheet can be used with other financial statements to conduct fundamental analysis and compute financial ratios.
With a balance sheet, it is crucial that the value of the asset column equals the sum of the liabilities and shareholder’s equity column. This means the balance sheet is sound, at least in an accounting sense. The assets column represents everything the business currently owns, which can include physical property, cash, equipment, trademarks, and many other things. The liabilities column represents everything the company owes, which can include both long-term and short-term debt.
Major TAKEAWAYS
- A balance sheet is a financial statement that reports a company’s assets, liabilities, and shareholder equity.
- The balance sheet is one of the three core financial statements that are used to evaluate a business.
- It provides a snapshot of a company’s finances (what it owns and owes) as of the date of publication.
- The balance sheet adheres to an equation that equates assets with the sum of liabilities and shareholder equity.
- Fundamental analysts use balance sheets to calculate financial ratios.
The Income Statement
The income statement on the other hand is called the profit and loss statement, it reveals the revenues, costs, and expenses over a period which is typically a fiscal quarter or a fiscal year. The income statement tells investors whether a company is generating a profit or loss. Also, the income statement provides valuable information about revenue, sales, and expenses.
The income statement shows the financial health of a company and whether a company is profitable. Both revenue and expenses are monitored closely. It’s necessary for the management to grow revenue while keeping costs under control. A case in point is revenue might be growing, but if expenses rise faster than revenue, the company may eventually incur a loss.
Investors and analysts keep a close eye on the operating section of the income statement to gauge management’s performance. However, investors and analysts scrutinize the balance sheet just as closely, as both the balance sheet and income statement together to provide a full picture of a company’s current health and prospects.
The top benefits of using an income statement.
- It tracks performance:
Knowing how profitable your business is is essential information to have. The format of the income statement allows you to easily read and understand if and how profitable your business is. The income statement shows all the revenue received in a period less all the expenses paid in that same period.
- Understanding what drives your profit
You can see whether revenue growth can drive your profit or trimming expenses will drive profit when you examine your income statement or a combination of both strategies.
- You can easily calculate the profit margin from your income statement, as the profit margin formula is (Total Revenue – Total Expenses) / Total Revenue. Maintaining consistent profit margins or increasing them over time will help your profit levels stay steady.
- Ensuring consistent profit month over month: When you monitor your profit on a regular basis you understand the fluctuations in your profit line and can identify problems before they become issues. Monitoring your income statement allows you to be proactive rather than reactive to your business needs.
- You can use an income statement as a forecasting tool: Forecasting ahead helps companies create goals for the business and monitor their results against their goals. A forecasting template is based on the structure of an income statement.
The bottom line is when you are familiar with the income statement and use it as a business tool, understanding the information the report is relaying to you will allow you to make informed and profitable business decisions. No business owner should be making decisions without understanding how those decisions will affect the bottom line of the business, which is the profit. Profit is what business owners get to keep at the end of the day. #EMBA28
