Investing in an up-and-coming company is an exciting process. Perhaps an entrepreneurial buddy has approached you with an opportunity to support their work, or you’ve spotted a start-up in the press that you just need to be a part of. Either way, you’re sure to be greeted with quite genuine enthusiasm for the business’s prospects, as entrepreneurs with hot new ideas tend to be quite excited about what they’re selling! It’s great if you have a chance to get involved, but rushing in without checking out the figures is never a good idea. However long the business has been up and running, any serious business owner should be ready to show you a document known as the business financial statement.
You don’t need to see the ins and outs of every transaction the company is involved in, and to some extent it’s none of your business. It’s the company’s job to manage their day-to-day affairs, and if they are doing so effectively and the business idea is sound then it will show up on the financial statement.
So how should you make sense of this statement? Well, it comes in three parts, and each one can tell you something different about the status of the business in which you are interested.
The first part is the business financial statement. This section will give you an idea of the scale of the business – whether it’s in the thousands or millions, how much debt was acquired in order to launch it, how much stock they’re sitting on, and how much of it they expect to shift this year.
The second part is known as the Income Statement. Usually, you can expect to see a set of figures covering the latest financial quarter, which is a good way of seeing how profitable the company is right now and how it’s faring up to its prospects. Of course, different industries have different hot and cold periods, but if the company has struggled to turn a profit in the last three months then you’ll need to ask some serious questions before being convinced that it’s a safe bet for your investment dollar.
The final section is the Cash Flow Statement. This will cover the same period as the Income Statement, but will exclude all considerations but the actual monies sent and received. A company that has a decent income but poor cash flow is going to lumber around like a dinosaur when it comes to making payments and issuing invoices – again, it’s worth drawing attention to if you’re not happy how it looks.
This new visual guide to business financial statements divides the document into even greater detail. Analyzing a business financial statement might not be the most exciting element of the investment process, but get to know it well and you have a much better chance of of seeing your speculation blossom into a profitable and prestigious concern.
