Brown Edwards Director Zach Webber reviews the three core financial statements – the balance sheet, income statement, and statement of cash flows. He also covers their importance, key metrics and explains how they help to evaluate a business and answer some key questions, such as, “Is this company successful?” “Are we making money?” and “Where did the money go?”

The Balance Sheet

A balance sheet is an overview of a company’s finances at a specific point in time. It is commonly prepared at month-end or year-end and reports a company’s assets, liabilities, and equity.

3 Key Metrics to Analyze

1. Working capital – This shows the strength of the company and its ability to meet its obligations as they become due. The larger the number, the better.
2. Loans to shareholders/owners – This can give us an idea if owners are pulling money from the company for personal use.
3. Overbillings and Underbillings – This tells us generally how contracts are performing and gives us an idea of management’s ability to estimate costs and bill in advance.

Income Statement

An income statement, also known as the profit and loss statement, provides valuable insights into a company’s operations, profitability, and efficiency.

3 Key Metrics to Analyze

1. Gross profit margin on contracts – This tells us how much money a contractor is making on its contracts. We want to make sure the margins are large enough to support overhead expenses.
2. Operating expense as a percentage of revenue – This tells us how management is able to control overhead costs in a way to maintain overall profit.
3. Other income – This is where we are looking for anything extraordinary that may not be recurring.

Statement of Cash Flow

A cash flow statement provides information about how the company is using and obtaining cash.

3 Key Metrics to Analyze

1. Cash Flow from Operations - Is the company generating cash from its core operations?
2. Cash Flows from Investing – This tells us information about how the company is investing in its business for the long-term or liquidating assets to support current operations.
3. Cash Flows from Financing - This provides insights as to whether the company is making debt payments and/or receiving funds from banks or owners to support operations.

These three core financial statements can reveal valuable information about a company. It is important to understand what the information means and how to interpret it in a meaningful way to help with the evaluation of a business.

If you or someone at your company could benefit from a deeper understanding of these statements, feel free to reach out to Zach or your dedicated Brown Edwards team member.

Watch Zach's full presentation on the Brown Edwards YouTube Channel.