Bank Statements over Financial Statements?

As answered in this Q/A thread, bank statements are just that; a trail of financial transactions (debits, credits) as it relates to those bank accounts.  Financial statements are a snapshot of the health of your business. As far as your inquiry into the best way to understand them....I would definitely ask your CPA or banker to review each of them with you.  That is what they are there for. If you don't have a CPA/accountant, I highly recommend getting one. Monitoring the financial health of your business is important to its success. 

The balance sheet is a snapshot on a particular date, the end of the year is a popular one (or end of month as you go through the year).   There are 3 components to the balance sheet:  Assets (this is what you have:  cash, furniture, computers, etc. - it can get more complex such as prepaid expenses etc., but here I'm trying to give you a "simple" approach.  Liabilities is the next section - this is what you owe such as you have a loan for the new computer you bought.    The 3rd Section is Equity - this is how much is yours.    If you have 10,000 of assets and owe 7,000 in liabilities on those assets, you have $3,000 that you "own."

Now, on to the profit & loss statement - this is where income and expenses are shown as you progress throughout your year.   Obviously, the income is revenues earned (what type of method of accounting you choose whether cash or accrual will determine if the revenues equal cash received or is a reflection of revenues earned).   That means you invoiced a client for 1,000 (I'm keeping this simple and saying services not goods).  If accrual based, the 1,000 is considered revenue even though you haven't received payment.  Therefore, cash basis means I don't recognize income until I get paid.

So, if accrual I recognize expenses as I owe them; cash, I recognize them as I pay them.   Generally, small businesses are on a cash basis.  It's simpler overall.

Now, if your income is higher than expenses, you have a profit; conversely, if your expenses are higher, then you have a loss.    This net income or loss will flow through to the balance sheet in the Equity section (that part that says how much you "own").  So, if you have net income - you will likely own more of your company while a net loss means you likely own less.

There are always exceptions, but hopefully, this helps a bit.  By all means, if you have a specific question, please let me know.

Oh, generally, it's good to compare current values to a year ago and even 2 years if you have the ability.  This will show what areas are increasing and maybe highlight an area that needs to be addressed.

Good Morning....what Mr. Weilbaecher has written is very true.  As a business owner it is vital that you are able to understand your financial statements.  Your bank statements are only part of the equation.  I too highly recommend you sit down with your accountant to review & teach to you about your financials until you are able to understand them yourself.  You can also take a basic accounting course to get you started.

everything stated is correct.  The question I would pose .... Do you understand the answers?  Finding someone that can break this data down in a way that is understandable to you is what I believe is important.  At our firm, we approach accounting from a business perspective instead of an accounting perspective.  I would suggest if you still need additional clarifications make sure the person you are working with "speaks your language". 

There are a series of questions presented here all in one.  First, the bank statements shows what money came in and went out of your bank account for a period of time, usually on a monthly or quarterly basis. This activity is then summarized and presented in the financial statements. As mentioned before there are 3 major financial statements: the balance sheet, income statement (or profit and loss statement), and the statement of cash flows. 

The balance sheet is a snapshot of the health of the company.  It begins with a list of the assets (what the company owns), then lists liabilities( what’s owed), and finally lists the owners equity (how much of the company is owned by the owner/shareholders), better known as book value or net worth. The balance sheet should always balance: Assets=liabilities+owner’s equity. 

The income statement ( or profit and loss) shows net income for a specific timeframe such as  a month, quarter, or year. Net income equals revenues minus expenses for the period. 

The statement of cash flows begins with net income and shows the  movement of cash in and out of the business for purposes of operating, investing, and financing the business. This statement tells how well the company manages its cash position. This does not include sales made on credit, it’s cash only, so it is different than net income(which includes credit sales).  If the amount is negative it could be a red flag, unless there is good reason, for example, maybe the company is expanding. 

A ratio analysis is normally used to analyze and evaluate financial statements between companies within an industry. The 5 common ratios used are profitability ratios, liquidity ratios, debt/leverage ratios, operations ratios, and market ratios. The 2 key ratios for investors are the net profit margin ( compares net income to revenues) and price to earnings (compares share price to earnings per share). This analysis should be done cautiously making sure you are comparing “apples to apples.”

Bank statements are very different from financial statements, and you need to look at and understand both on a regular basis.

Bank statements simply tell you how much money was deposited into your account, what debits and checks were drawn on the account, and how much was actually in your account at the end of the statement period. These statements along with, credit card and loan statements contain the data that gets entered into your accounting system to produce financial statements which are then used to prepare your tax returns.

Financial Statements tell you about the current and past financial health of your company. The Profit & Loss statement (P&L) for a month or a year tells you how much Income came in, how much of that was spent on Cost of Goods Sold and regular office Expenses and what your Net Profit was at the end of that statement period. Your net profit is what gets taxed by state and federal governments.

The Balance Sheet tells you what your Assets are worth (cash in the bank, fixed assets like buildings, furniture, trademarks, and patents, and other assets like loans you made to others which are owed back to you) and what your Liabilities are (financed debts you owe - loans and credit cards) at the end of that statement period, and what the owner(s) or shareholder(s) Equity is valued at (a combination of things like owner's cash draws from the company, retained earnings, and the net income of the company as reported on the P&L.)

Your accountant or tax preparer should be happy to go over the financial statements from your company on a regular basis with you, and your industry national board should be able to provide you with the average Costs of Goods Sold percentage for a business of your size in your industry.

The statements below are quite accurate. The only thing I would add, as a business broker, is that these statements help you to understand what your business would be worth if you were to sell. Keeping accurate records is essential as a potential buyer wants to see them. My suggestion is also to take your profit as owner's salary as this is reflected on the profit and loss statement and eventually the tax return.

  Many owners tend to take owner's draw also known as owner's distributions as opposed to salary. This is a problem when evaluating your business for sale. Owner's draw is a balance sheet item and therefore does not show up as discretionary earnings which is what is used to calculate the value of a business.

Compare them with benchmarks. Bizminer is one source of such benchmarks

Bank statements are registries of the business use of income and expenses.  It is considered to be a reliable tool by accountants and bookkeeping to built up a company financial statement.  Receipts are also good.  Some bookkeeping software uses the bank statement and links the receipts to the line transaction. It’s a liable source use by the IRS in audits.  From Bank Statements, Financial Reports are generated providing the business owner with reports that focus on their business financial health. I highly recommend quarterly reports to be generated and reviewed with the business owner, especially if it is a new business.  These reports will provide guidance and an accurate snapshot of their business financial health, business performance as well as business valuation.  I would say, one is needed in order to get the next step.

Not sure what you are asking.  There are different docs for different loans