How To Read Financial Statements

In very simple terms a financial statement will show the income, expenses and profits of your business or household. If it is a business financial statement it shows your liabilities (expenses), which are deducted from your income. The balance will be your net profit.

Reading a financial statement may seem as complicated as trying to figure out the IRS, but it isn't.

There are positives and negatives. A positive would be $24,000 in annual income from rental properties, while a negative would be the $18,000 of that amount which is paid out for mortgage payments, insurance, and property maintenance. In this example, only $6,000 of that $24,000 is a true positive.

The same holds true for large and small business and for households. Your net profit will be the result of deducting all money that is paid out from all money that is coming in. This sounds repetitive, but the similarities between a business financial statement and a personal financial statement are very much the same.

Personal Financial Statement

The personal financial statement will show listings for Net Monthly Income. Net means the balance after payroll taxes are taken out.

Then it will show Fixed Expenses. These are the things that you must pay every month, such as rent or mortgage, utilities, water, gas sewer, electricity, telephone, cable, insurance, and child care. In other words these are fixed amounts that do not change.

You will also see Creditor Payments. These are installment and automobile loans and credit card payments.

Next will be your Flexible Expenses. These expenses are things which can change monthly, such as savings, groceries, lunches, beverages, tobacco products, eating out, barber and beauty shop costs, entertainment, clothing, gas or bus and taxi fares, newspapers, magazines, parking fees and toll fees, among others.  It's important to keep a close eye on these expenses, as they can add up quickly if you're not paying attention.

Business Financial Statement

A business financial statement will read the same; it's just that the descriptions of the items themselves will be different. For business you may see items like utilities, advertising, labor cost and payroll or accounting costs.

On your financial statement the Fixed Expenses, Creditor Payments, and Flexible Expenses are deducted from your net monthly income.

It is hoped that you would have some cash left over that you could use to pay off creditor balances, or that in studying your statement you will find areas where you could cut back and save some money for other things.


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