Reviewing Financial Statements
Growing companies are “market driven”. The sales of the business are increasing rapidly. This rapid revenue growth triggers changes in the operational, financial and human resources elements of the business.
Finance is affected in two ways, from an income statement perspective (revenue, expenses and profits) and from a balance sheet perspective (assets, liabilities and equity). It is helpful to review these statements.
Income Statement
This tracks the revenue and expenses over a period of time. We can calculate the statement for a month, quarter or a year. When planning, we forecast what we think the revenue and expenses will be in the future. This is called a pro forma income statement and it shows:
Balance Sheet
The balance sheet is like a snapshot of your business, frozen in time. It tracks three things:
Thinking of it in a different way, the balance sheet represents the things that a business has (assets) and how it paid for those things (liabilities and equity). A starting balance sheet states what assets you need to start the business, and how you plan to pay for those assets. You can either borrow the money (liability) or you can invest your own money (equity).
When your business is growing, you will need more assets. For example, you may need to carry more inventories to satisfy your customers. Or you may need to purchase more equipment to produce more of your products. These assets need to be financed. Sometimes, you can finance your assets using your profits. Most often, you will need to borrow money to finance those assets.
© 2009 "Start Small, Grow Big" Barbara Mowat and Ted James, with the contribution of William Erichson on Chapter 6, "Financing A Growing Business". All rights reserved. Reproduced with permission. No part of this work may be reproduced, distributed, amended, modified, edited, transmitted in any form, or translated in any way without the prior written permission of the copyright owners. www.ImpactCommunicationsLtd.com.