How To Read and Understand Financial Statements

February 20, 2024
minutes to read
Ben Mensah
Table of Contents

As crucial written records that encapsulate the financial activities and performance of a company, the importance of learning how to read and understand financial statements cannot be overstated for small business owners. Serving multiple purposes, from guiding internal decision-making to providing external stakeholders with essential information - financial statement know-how can be the key that unlocks proper business understanding. In this in-depth guide, we’ll break down what financial statements are, how to read and understand them and show you how Thriday can make the whole process a breeze.

Understanding Financial Statements

Why are financial statements important?

The primary aim of financial statements is to offer a detailed account of a company's financial position, profitability, and growth prospects. These statements are vital for running a business efficiently, assessing its financial health, and making data-driven decisions. They can also be scrutinised by external entities like investors, market analysts, and creditors to gauge a company's financial stability and growth potential.

Types of Financial Statements

There are three main types of financial statements, each serving a unique purpose:

  • Income Statement: This statement outlines a company's revenues and expenses over a defined period, offering insights into its profitability.
  • Balance Sheet: This provides a snapshot of a company's financial standing at a specific moment. It lists the company's assets, liabilities, and shareholders' equity, helping you understand what the company owns and owes.
  • Cash Flow Statement: This shows the cash inflows and outflows over a particular period, helping assess the company's liquidity and its ability to meet financial obligations.

By regularly analysing these financial statements, business owners can evaluate performance, strategise effectively, and secure necessary financing. Investors and creditors also rely on these documents to make informed decisions regarding resource allocation.

For those who find the process of creating and analysing financial statements daunting, fear no longer! Thriday is a streamlined and holistic solution to the accounting headache, as a standout all-in-one financial management platform carefully developed to eliminate financial admin for small business owners. 

With banking* and accounting seamlessly integrated in the same platform, Thriday leverages the power of artificial intelligence to automatically generate real-time financial statements from your business’s financials, allowing you to focus on what really matters—running your business.

Simplifying Financial statements with Thriday

Creating essential financial statements can feel overwhelming for even the most experienced small business owners. Traditional platforms usually require manual sorting of transactions, determining appropriate categories, and constructing financial charts from the ground up. 

However, Thriday changes the game entirely.

Thriday is a comprehensive all-in-one financial management solution engineered to take the hassle out of financial administration for small business owners. Seamlessly integrated with your business transaction accounts*, Thriday employs advanced AI to automatically categorise all your transactions. These are then used to generate real-time financial reports, offering you a constantly updated panoramic view of your business's financial standing whenever needed.

With Thriday, you can say goodbye to complicated setups and laborious categorisation tasks, and you certainly won't have to give up your weekends to financial admin anymore. Thriday handles it all, allowing you to concentrate on your core competency—successfully running your business.

How does Thriday work?

  • Seamless Banking* Integration: Thriday's intuitive app comes with integrated bank accounts*, ensuring that all your financial transactions—whether incoming or outgoing—are automatically in sync with Thriday. This eliminates the need for setting up separate bank feeds or manual data input.
  • Automated Accounting: Utilising cutting-edge Artificial Intelligence, Thriday categorises all transactions with unparalleled accuracy, regardless of your industry. This not only streamlines your bookkeeping but also automates your tax compliance.
  • Receipt Reconciliation: Forget about the tedious task of matching receipts with transactions. Snap a photo of your receipts and the platform handles the categorisation, be it income or expenses for those sweet EOFY deductions.
  • Financial Report Generation: Thriday offers automated analysis of your income and expenses into essential business reports. Stay informed about your business's financial well-being with access to income and cash flow statements, tax estimates and summaries, a balance sheet and more – automatically generated and updated in real-time as transactions happen.

Go about your business as usual using Thriday's integrated business transaction accounts*, and let the app handle the rest. It automatically reconciles transactions to generate accurate financial reports, freeing you from the burden of financial administration.

Discover more about Thriday's seamless banking* integration here.

Thriday is an all-in-one financial management platform that combines banking* and accounting in one user-friendly interface to automate and eliminate financial admin for small business owners

How to Read an Income Statement

As the first of the three key statements, understanding how to read an income statement is crucial for assessing a company's profitability. Here's a step-by-step guide to make it easier for you:

1. Know the Objective

An income statement outlines a company's revenues and expenses over a specific time frame, offering insights into its profitability. It's also a basis for calculating key financial ratios that shed light on the company's financial performance.

2. Recognise the Core Sections

The income statement is segmented into three primary areas: revenue, expenses, and net income. Revenue is the total earnings from operations, while expenses are the costs incurred to run the business. Net income is essentially the profit, calculated as revenue minus expenses.

3. Scrutinise Revenue

The top line of the income statement, revenue, is crucial for assessing a company's sales growth and market share. 

4. Inspect Expenses 

Expenses are categorised into the cost of goods sold (COGS) and operating expenses. COGS are the direct costs of production, and operating expenses include other costs like rent and salaries. Understanding these can help you gauge a company's cost structure and profitability.

5. Evaluate Net Income 

This is the bottom line, representing the profit or loss made during the period. It's a key indicator of a company's overall financial health.

6. Leverage Financial Ratios

Ratios like the gross profit margin and return on assets (ROA) can be calculated to further analyse financial performance.

With Thriday's real-time financial reporting, you can easily generate and analyse your income statement. The platform automatically categorises your transactions and updates financial reports in real-time, giving you an up-to-date snapshot of your business's financial health – available anytime, anywhere in convenient web and mobile apps. 

No more manual calculations or outdated reports; with Thriday, you get accurate, real-time data to make informed decisions.

By mastering these steps and utilising Thriday's automated features, you'll be well-equipped to understand your income statement and make data-driven decisions for your business.

How to Read a Balance Sheet

A balance sheet provides a snapshot of a company's financial position at a specific point in time, offering valuable insights into its assets, liabilities, and owners' equity. These are the key steps to unpacking the balance sheet:

1. Start with the Basic Equation

Every balance sheet is rooted in the fundamental equation: Assets = Liabilities + Owners' Equity. This equation ensures that the company's total assets are always equal to the sum of its liabilities and owners' equity.

2. Identify the Main Sections

A balance sheet is typically divided into two primary sections: assets on the top or left side, and liabilities + owners' equity on the bottom or right side. Familiarise yourself with these sections to understand how they interact.

3. Focus on Current Assets

Current assets are those that can be converted into cash within a year, such as cash, accounts receivable, and inventory. Evaluating these can give you a good idea of the company's short-term liquidity.

4. Examine Non-Current Assets

These are assets that won't be converted into cash within a year and include items like property and equipment. Understanding these can help you gauge the company's long-term investment strategies.

5. Review Liabilities

Liabilities encompass all the debts a company owes, from accounts payable to loans and taxes. Analysing this section helps you assess the company's ability to meet its financial obligations.

6. Understand Owners' Equity

This represents what's left of the company's assets after all liabilities are deducted. It's a key indicator of the company's overall financial health and its ability to generate profits.

7. Calculate Financial Ratios

Ratios like the debt-to-equity ratio or the current ratio can provide additional layers of understanding about a company's financial leverage and liquidity, respectively. 

If you want to dive deeper into preparing and reading the balance sheet for your small business, you can learn how to calculate financial ratios and more here.

Thriday Balance Sheet
Thriday creates and manages your business' Balance Sheet and other financial reports automatically to keep you updated in real-time

How to Read a Cash Flow Statement

Cash flow statements go beyond profitability to offer a comprehensive view of how money moves in and out of a business over a specific time frame. Here's how to dissect a cash flow statement:

1. Understand the Purpose

The cash flow statement serves to detail the cash generated and expended during a particular period. It's divided into three main categories: operations, investment, and financing.

2. Identify the Main Sections

At the top of the statement, you'll find the time period covered and the initial cash balance. The statement then breaks down into three primary sections: cash flow from operations, cash flow from investing, and cash flow from financing.

3. Analyse Cash Flow from Operations 

This section reflects the cash generated from the core business activities. It starts with the net income and adjusts for non-cash expenses like depreciation to provide a more accurate picture of actual cash flow.

4. Examine Cash Flow from Investing

This part deals with the cash involved in buying and selling long-term assets like property and equipment. It helps you understand the company's investment strategy.

5. Review Cash Flow from Financing 

Here, you'll see how the company is funded, whether through debt or equity. This section includes activities like issuing stock, paying dividends, and repaying loans.

6. Calculate Financial Ratios 

Various financial ratios can be derived from the cash flow statement. For instance, the cash flow coverage ratio can indicate the company's ability to meet its debt obligations, while the free cash flow ratio can shed light on its ability to generate cash.

By following these steps, you'll be equipped to read and analyse a cash flow statement effectively. This will enable you to make informed decisions, whether you're considering an investment, evaluating a loan, or simply gauging the financial health of your own or another company.

With Thriday, you can enjoy real-time access to automatically generated and maintained cash flow statements and forecasts without lifting a finger! Learn more about simplifying the cash flow statement with Thriday here.

Thriday Cash Flow Statement
Enjoy the benefit of a simple and clear Cash Flow Statement generated automatically from your transactions in Thriday's all-in-one financial management platform

Wrapping Up: Empower your Decision-Making with Thriday

The intricacies of financial statements can be a complex endeavour, but understanding them well is an essential skill for any business owner, investor, or stakeholder. From understanding the significance of income statements, balance sheets, and cash flow statements to mastering the art of reading them, this guide has provided you with a comprehensive roadmap to statement literacy!

Yet, the beauty of living in this digital age is that you don't have to go it alone. Thriday's all-in-one financial management platform revolutionises the way you handle your business's financials. With real-time, automated and clear financial reporting, Thriday takes the guesswork out of your financial analysis, allowing you to focus on what truly matters—growing your business.

So why get bogged down with manual calculations or outdated and unclear reports? Step into a world where financial management is simplified and empowering. 

Join Thriday today and elevate your financial literacy to new heights.

DISCLAIMER: Team Thrive Pty Ltd ABN 15 637 676 496 (Thriday) is an authorised representative (No.1297601) of Regional Australia Bank ABN 21 087 650 360  AFSL 241167 (Regional Australia Bank).  Regional Australia Bank is the issuer of the transaction account and debit card available through Thriday. Any information provided by Thriday is general in nature and does not take into account your personal situation. You should consider whether Thriday is appropriate for you.

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