Becoming an effective manager requires continuously honing and improving your management skills. This could mean exchanging resources with others in your network, reading books or publications, or taking online courses. Show
Not to be overlooked are the management tools you have at your immediate disposal: your business’s financial statements. Financial statements can be used by managers to track performance, budgets, and other metrics, and as tools to make decisions, motivate teams, and maintain a big-picture mindset. Access your free e-book today. DOWNLOAD NOW3 Financial Statements Used by ManagersThere are three key financial statements managers should know how to read and analyze: the balance sheet, income statement, and cash flow statement. The balance sheet provides a snapshot of a company’s financial health for a given period. It lists the assets, liabilities, and equity line by line for the period so that stakeholders can understand the breakdown. The income statement, also known as the profit and loss statement, or P&L, gives an overview of the income and expenses during a set period. Typically presented annually or quarterly, the income statement allows businesses to compare trends in income and expenses over time. Finally, the cash flow statement details the inflows and outflows of cash for a specific period. Broken into operating activities, investing activities, and financing activities, the cash flow statement demonstrates the business’s ability to operate in both the short and long term. When analyzed together, these statements provide a holistic view of the financial health of your organization. They can be used to learn from previous pitfalls and successes as you strategize for the future. Here are six ways you can leverage your company’s financial statements to excel as a manager. Related: How to Prepare a Balance Sheet: 5 Steps for Beginners 6 Ways Managers Can Use Financial Statements1. Measure ImpactAs a manager, it’s important to have a method for tracking the impact your efforts have on your company’s bottom line. Take a look at your company’s income statement, and note the direct expenses related to the revenue for that period. Perhaps you purchased a piece of software, requested more ad spend, or hired a specialist for a big project. Did those expenses result in the net income you were targeting? Moving forward, you can learn from your mistakes and double down on investments that paid off. 2. Determine BudgetsFinancial statements are also useful when managing and planning budgets. Because the financial landscape is ever-changing, John Wong, HBS Online’s Senior Associate Director of Financial Planning and Analysis, cautions against using previous financial statements as a starting place for future budgets. “Historical data is essential to building a budget, but should be used as a reference point and not necessarily a starting point,” he writes in a previous blog post. An understanding of your company’s financial health and history is necessary when budgeting, and should be paired with a forward-thinking mindset. 3. Cut Unnecessary CostsBeing able to see your company’s expenses line by line on both the income and cash flow statements can highlight areas where it’s possible to cut costs. Maybe you’ve been paying a monthly subscription for a service you no longer need, or your team outings could be scaled back in favor of more inexpensive activities. Seeing a list of every expense and how it impacts your company’s net income can be an eye-opening chance to save money and reallocate spend where it’s needed most. 4. Think Big-PictureKeeping the broader health of your organization in mind is vital when managing your team. Analyzing the balance sheet, income statement, and cash flow statement can allow you to understand the ins and outs of your company’s finances and give you bigger-picture clarity to guide your goal-setting and decision-making processes. Related: 5 Ways Managers Can Use Finance to Make Better Decisions 5. Align Across DepartmentsYour company’s financial statements can be used to ensure multiple departments are on the same page. When managers from each department have analyzed the statements, discussions about goals and budgeting can center on a shared understanding of the organization’s current financial health, and offer perspective into other managers’ goals and motivations. 6. Drive Team MotivationConsider using your company’s financial statements as tools to motivate and engage your team. The income statement can show how your employees’ projects positively impacted the company’s revenue, which could boost their performance and drive. When setting team goals, leverage financial statements to provide context for why specific benchmarks were targeted and the thought process behind your plans for reaching them. Instill in employees your same big-picture mindset and the knowledge that their efforts make a tangible difference to the company.  Become a Finance-Driven ManagerYour organization’s financial statements are valuable assets you can use to make strategic decisions and manage your team. If you’re unsure of where to begin, brushing up on your financial literacy, networking with finance professionals, or taking a finance course are great places to start. Bolstering your financial knowledge can enable you to make the best use of the resources available to you and become a finance-driven manager. Are you interested in using finance to become a better manager? Explore our six-week online course Leading with Finance and other finance and accounting courses and discover how you can gain the skills and confidence to use the fundamentals of finance in your career.
A company’s choice of inventory valuation method can have a significant impact on the presentation of its financial statements. Financial items such as cost of sales, gross profit, net income, inventories, current assets, and total assets as well as the financial ratios computed from them, will be impacted. It is therefore very important that consideration is given to these factors when analyzing and comparing the financial statements of companies that rely on different inventory methods. For example, a restatement from the LIFO method to the FIFO method is critical for making a valid comparison between a company that uses the LIFO method and another that uses a method other than the LIFO method. Analysis and Comparison of Financial Statements of Companies Which Use Different Inventory MethodsTo illustrate the analysis and comparison of the financial statements of companies that use different inventory methods, an example will suffice. Example:The following comparative information is provided for companies A and B, wherein company A uses the LIFO method, while company B uses the FIFO method for valuing inventories: $$\begin{array}[t]{l|r|r} \text{} & \textbf{Company A (LIFO)} & \textbf{Company B (FIFO)} \\ \hline \text{Inventory} & \text{\$256,000} & \text{\$302,000} \\ \text{Total Assets} & \text{\$1,452,356} & \text{\$1,345,000} \\ \hline \text{Financial Ratios} & \text{} & \text{} \\ \hline \text{Inventory Turnover Ratio} & \text{4.73} & \text{3.12} \\ \text{Days of Inventory on Hand} & \text{76 Days} & \text{115 Days} \\ \text{Gross Profit Margin} & \text{19.18%} & \text{20.24%} \\ \text{Return on Assets} & \text{4.78%} & \text{5.36%} \\ \text{Current Ratio} & \text{1.14} & \text{1.30} \\ \hline \text{Other Indicators} & \text{} & \text{} \\ \hline \text{Inventory to Total Assets} & \text{17.63%} & \text{22.45%} \\ \begin{array}{l} \text{Growth Rate in Finished} \\ \text{Goods Inventory} \end{array} & \text{30.35%} & \text{39.24%} \\ \text{Growth Rate in Sales} & \text{13.98%} & \text{7.82%} \\ \end{array} $$
Learn about financial statements and reports including profit and loss, cash flow and balance sheets. On this page
Financial statements are historical. They show you how your business has been operating in areas such as profitability, cash flow, assets and liabilities. There are 3 major financial statements to understand:
These statements are important to help you:
You should produce financial statements regularly and keep them up to date. Profit and loss statementsA profit and loss statement, also known as an income statement, shows the profitability of your business over a specific period. It can cover any period of time, but is most commonly produced monthly, quarterly or annually. A profit and loss statement is a useful tool for monitoring business activity.
Contents of a profit and loss statementYour profit and loss statement will generally be split into 2 sections:
RevenueThe most important part of the revenue section of your profit and loss statement is total sales. Secondary revenue and other income can be unpredictable, so you should focus on your primary sales revenue to grow your business. Secondary sources of revenue can include:
Note how much sales have risen or fallen since your previous profit and loss statement. Breaking sales figures down into individual products or product lines will help you see which products are performing well and which products need attention. Always look to maintain or increase revenues over time. A pattern of falling revenue may indicate that your business is in trouble. ExpensesThe 2 main sets of figures in the expenses section of a profit and loss statement are:
Aim to minimise your business costs wherever possible. Rising material costs could mean you need to find a different supplier, or find more efficient production methods. Some increases are inevitable, with inflation likely to cause costs to increase across a market over a period of time. Operating expenses can be harder to reduce. For example, if your rent rises it may not be practical to move to alternative premises, or moving may be more expensive than paying the increased rent amount. Check your profit and loss statement for any sudden or unexpected spikes in costs, rather than gradual increases over time (due to factors such as inflation and annual employee pay rises). How to calculate profitUse your profit and loss statement to extract important figures to explain your business's profitability:
Balance sheetsA balance sheet (also known as a statement of financial position) is a summary of all your business assets (what your business owns) and liabilities (what your business owes). At any point in time, it shows you how much money you would have left over if you sold all your assets and paid off all your debts. This is also known as ‘owner's equity’. There are 3 sections in a balance sheet, represented by the following: Formula: Owner's equity = Assets - Liabilities It is called a balance sheet because, at any given moment, each side of this equation must 'balance' out. Assets
Current assets are assets your business plans to keep for a short period of time, usually less than 12 months. They include:
Fixed assets are assets your business plans to keep for a longer period, usually more than 12 months. They are also called non-current or capital assets. They include:
Intangible assets are assets you can't touch and can include:
Learn more about how to value business assets. Liabilities
Current liabilities are usually things you will pay for during the next 12 months. They may include:
Non-current liabilities are things that you will not pay for, or pay off, within a year of your balance sheet date. They include:
Owner's equity, also called shareholders' equity in companies, is the remaining portion of a business that belongs to the owner(s) after deducting total liabilities from total assets.
Make sure you consider depreciation when interpreting your balance sheet. Every time your business uses a fixed asset—such as office equipment or a vehicle—some of its value is lost. Australian tax law requires you to spread the cost of assets over the years in which you use them (depreciation).
A cash flow statement shows how much cash is moving in and out of your business over a period of time. This reflects the 'liquidity' of your business. Having enough cash available to pay your debts and buy materials and assets is an important part of business planning. A cash flow statement will quickly tell you if you are likely to have any issues in this area. Cash flowing in is most often the money you get from sales, but it may also be from:
Your outgoing cash includes expenses such as:
Read more about managing cash flow and cash-flow invoices and payments. There are normally 3 sections in a cash flow statement, each relating to a different area of your business.
This section contains the main cash-generating activities of your business. This is generally any money earned or spent in the day-to-day running of your business. The largest figure in this section should be the net income generated by sales of the goods or services you produce. Accounts receivable (money owed to you) and accounts payable (money you owe) will also appear in this section. If accounts receivable are increasing at a faster rate than income from sales, you may have a problem managing your debtors.
This section measures the flow of cash between your business and its owners and creditors. Cash income in this section can include:
Cash expenditure in this section can include:
Investing activities listed in this section generally include purchases or sales of long-term assets, such as property, plant and equipment. Include the sale or purchase of investment securities here.
Your cash flow statement may include a few or many items, depending on the size and complexity of your business. The most important figure is your net cash flow, found at the bottom of the statement. Compare this figure with the net cash flow from your previous statement. If your cash reserves:
Also consider...
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Why is it so important to compare a firms financial statements with those of previous years?
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