hey it's patti scharf CPA and co-founder of catching clouds the leader in
e-commerce accounting today we're going to go over how to read financial
statements this is an example I've already kind of talked about what the
different financial statements are in another series of videos that I've done
you can check out links down below if you're not familiar but we're gonna be
covering the balance sheet the income statement and the statement of cash
flows and as we go through them and I'm going to show you kind of what I'm
looking for what things might be red flags and what key metrics you should be
checking out as you're going through the financial statements so let's get
started with the balance sheet
okay so the balance sheet is a listing of everything that you own or oh you've
got your assets at the top you've got your liabilities at the bottom and then
you've got equity under that equity is basically the value of your company you
take your assets you take you subtract out your liabilities and you are left
with what the company is worth now this is what it's worth on a cost basis it's
not the same as maybe you could get out in the free market but it can give you
kind of a sense of whether your company has value or not okay so when you're
looking at this you're going to be checking out that the first thing I
would do when you're checking out the balance sheet is to make sure that the
numbers make sense okay so when I look at the balance that's in the checking
account I want to make sure it matches against the reconciliation I did against
about against the actual bank if you want to know how to do that you can
check out this video here I'm going to take a look at accounts receivable I
will pull up an aged receivable just to kind of take a look see the number here
is 29 85 and the number here is 2985 this tells you exactly what's on the
balance sheet and if there's something on here that you don't think you're
gonna be able to collect you need to write that sucker off because otherwise
this number really doesn't represent the truth and you always want your numbers
to represent the truth okay so you're just going to go through and see if
there's a way to verify each and every number now as I'm looking at this I'm
kind of raising my eyebrow at the computer equipment number because it's a
big ol negative number and you can't have negative computer equipment so I
would just open up the detail of this hold down control click on it it'll open
a new tab for you and it gives you the details of what that is it looks like
there was a journal entry with that was recorded I argue that this number isn't
right because it's taking out more than it's supposed to so I would definitely
look into that and fix it if you can and then just go through all of these
the other thing that I would raise an eyebrow to is historical adjustment
there really shouldn't be any historical adjustments if you're keeping up with
your books and things are nice and clean in this case I took a look and it it
showed up when they converted the file from a different software type to here
they didn't know what it related to and they just booked it here I would say
that needs to come off as well maybe at the end of the year maybe at the end of
the month whatever makes sense for your business but if you can't identify it
you might need to amend a prior your tax return or whatever so so that's
something else that I would kind of take a look at but the rest of it if it looks
good then here are the things that you should pay attention to when you're
looking at your balance sheet the first thing is your equity you want to make
sure that the value of your business is growing over time and the way that that
happens is by checking out the trend of the equity so if you're looking at it
you're like four thousand forty two hundred fifty two hundred yeah it's
going up that's a nice churro no that's not good
okay now it's tanking you're gonna want to check out okay what happened in the
last couple of months that made your current year or your current year
earnings balance plummet so your year-to-date
in July was a net loss of forty eight hundred your net loss in August is
almost 13,000 like something's going on here we'll go take a look at the income
statement a minute and see what's going on with that but the fact that this is
going down should tell you as a business owner that something might be wrong that
you might need to fix as the business owner okay the other thing you want to
take a look at super important anything that is a current asset so your
bank balance plus any current assets like accounts receivable anything that
you're collecting within the next year you want to make sure you want to take
the total of that so about what $4,500
that to your current liabilities which is 17,500 you have about $4,500 to cover
about 17,500 dollars worth of expenses of liabilities over the next year that
should be concerning to you as a business owner you really want that
ratio to be at least one to one better yet if you can make it two to one all
right because this tells me that you're probably gonna run out of cash before
these liabilities come due so that should concern you as well by the way
the current assets divided by current liabilities is called the current ratio
so if people talk about that now you know what that is okay so now let's hop
on over to the income statement the income statement is a whole bunch of
basic math you've got your sales that come in you subtract out the cost of
your goods sold you subtract out all your other expenses what's left over is
your profit so when they talk about the top line they're talking about the sales
that you made they're talking about the bottom line they're talking about your
net profit or net income okay so when you're looking at this it's
going to be a little bit of a gut check a lot of people especially ecommerce
sellers who are selling on Amazon or Shopify or something they have a sense
of what the sales should be for the year and if those don't reflect what your
expectations are you should drill down and find out why not you might be
missing something okay now the cost of sales I have a lot
of videos about that go check out one of these and it'll point you in the right
direction okay that'll take you to your gross profit and then all the rest is
just the expenses of running the business the stuff that you care about
I'd say the two most important numbers on here when you're looking at the
trends is going to be your sales and the trends just basically how it's going so
it kind of is hobbling around and then it goes up and then it goes down again
and then it goes up and up this this increase towards the bottom or towards
the most recent months that's good you want
see your sales increasing over time as you might expect but then you want to
make sure that your net income is increasing kind of parallel to your
sales you will have both of those numbers kind of going up at the same
time and when you're looking at this you'll see they don't actually it kind
of gets worse at the same time that the top sales are getting better so you want
to look at these numbers and go okay why is that there was a huge increase in
advertising which I would be concerned maybe this will pay dividends maybe down
the road but you know for an increase of what twenty five hundred dollars roughly
of sales actually not even to spend $8,000 in advertising not a great return
on your investment so you need to tweak that a little bit consulting and
accounting okay it is what it is you want to make sure though that that
you're getting big bang for your buck on any of these big expenses that you've
got I would also check out anything that looks oh and here's the culprit down
here it's the wages and salaries so you've got like nine thousand dollars
now per month in wages but that's just barely less than what you're actually
bringing it in sales and that's what's accounting for this huge loss that
you've got going on so you might need to restructure and figure out how to keep
your business profitable maybe with this huge advertising and the extra manpower
maybe in September you'll see all of this turn around but these are things
that you want to pay attention to and keep your eye on when you're looking at
your financials but mostly you just want to see look at the trends look and see
do the numbers make sense if you see a particularly big number and it doesn't
feel right why did I don't remember spending $4,500 ctrl and click and you
can get the details and go oh yeah that's right okay yeah I know what I was
doing okay makes sense all right so let's move on to statement of cash
flows for statement of cash flows it actually has three different sections
operating activities investing activities and financing activities it
looks like this company didn't use any financing so it's not included on there
if you have if you've taken out a loan and you don't see financing activities
on your statement of cash flows that should be a big red flag this your
financing your business somehow that should be separated out okay the number
the big number that you care about on this report is the operating activities
the net cash flows from operating activities you're looking at this number
here you want it to be positive you want positive cash flow if your business the
regular operations of your business is not generating enough cash to stay
positive you're going to have some problems down the road because chances
are you are filling in that gap other ways you're using credit cards you're
using you you you take out a loan or something like that and that can mask
the problem that you're having unless you're looking at your statement of cash
flows so when you look at your statement of cash flows this number really needs
to be positive and if it's important to your business to invest in something
like equipment for your business you want to make sure that this is positive
enough just not only to cover basic operations but also to cover any
additional influxes of cash that you're going to need for investing in equipment
for your business to help keep it healthy so the higher your net cash
flows from operating activities the healthier your business is going to be
if you're just getting started make sure you check out our e-commerce startup
guide it will give you lots of helpful information about how to avoid some
pitfalls and get started with your online retail business if you like this
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I'll catch you later