In the business field, the most basic and practical financial knowledge is to understand three statements. Simply put, the cash flow statement determines whether the company can survive; the balance sheet and income statement determine whether the company is surviving well. Let’s study these three reports separately.
balance sheet
The balance sheet measures the relative relationship between the value of the assets held by a company and the value of its liabilities. It's like a car's oil pressure gauge, reflecting the health of a business over a certain period of time.
The balance sheet records the assets and liabilities of a company and shows all its operating performance since its establishment. The balance sheet consists of three parts: assets, liabilities and owner's equity.
Assets include current assets and fixed assets, liabilities include current liabilities and long-term liabilities, and total assets minus total liabilities are owners' equity.
The balance sheet reveals what the net income statement and cash flow statement do not, such as accounts receivable, current and fixed assets, accounts payable, long-term liabilities, and owner's equity.
The balance sheet records the cumulative performance of a business since its inception, and usually the net income statement and cash flow statement only show monthly and annual totals.
cash flow statement
The cash flow statement records the inflow and outflow of a company's real money. Operating income, net profit and other data are not real money, so a company's net profit and net cash flow are usually different, and these two data The difference is exactly equal to the change in assets and liabilities in the balance sheet. This is the core of the close connection between the three tables.
Formula: Net cash flow = net cash flow from operating activities + net cash flow from investing activities + net cash flow from financing activities.
The cash flow statement is divided into three parts, which describe a company's operating activities, investing activities and financing activities. In fact, the main work of every company is carried out around these three aspects. The financial indicators corresponding to the three activities are: net cash flow generated from operating activities, net cash flow generated from investing activities and net cash flow generated from financing activities. Net cash flow. So what do these three indicators mean? Let’s explain each one below:
The net cash flow generated from operating activities is positive, which means that the money received from the company's operating activities is greater than the money spent, and it can support the company; otherwise, it cannot make ends meet;
If the net cash flow generated from investing activities is positive, it indicates that the company is earning income from investment, but the specific source of this income must be determined; otherwise, it is investment expenditure;
Net cash flow from financing activities is positive, indicating that the company is raising capital.
income statement
The core content conveyed by the income statement is: whether the company makes money and where it makes money. However, the calculation logic of the income statement is much more complicated than that of the balance sheet. The formula is:
Operating profit = operating income - operating costs - business taxes and surcharges - asset impairment losses + gains from changes in fair value + investment income.
Total profit = operating profit + non-operating income - non-operating expenses + subsidy income + exchange gains and losses.
Corporate net profit = total profit - income tax.
For businesses, profitability is the most important thing. If the gross profit of a product or service is too low, it will not be able to support the normal operation of the company.
How to increase and maximize profits is a question that entrepreneurs need to think about. The first thing entrepreneurs need to pay attention to is whether the gross profit margin reaches the minimum rate of return - 30% of net income. There are two ways to increase gross profit margin: reducing costs and increasing selling price (that is, increasing net income).
The above is the main content of the three tables. Next, let’s talk about the methods to analyze these financial data.
(1) Trend analysis
This analysis is very simple. It means comparing it with past data to see whether it has gotten better or worse, why it has changed like this, and what will happen in the future.
(2) Comparative analysis
Comparative analysis usually has a competitive object, comparing with competitors, industry benchmarks, and industry averages.
(3) Isotype analysis
Isotype analysis is a structural analysis method that can help understand the proportion of each financial data item in the total data. For example, if each item in the income statement is divided by operating income, you can clearly see the proportion of each revenue and cost.
At the same time, homogeneous analysis can also be combined with trend analysis and comparative analysis. Trend analysis and comparative analysis can be performed based on the ratios after homogeneous analysis to gain a deeper understanding of the company's situation.
Finally, the three financial statements are a whole and need to be viewed together. The difference between net profit and net cash flow is always equal to the change in other assets and liabilities except cash on the balance sheet. This is the connection between the three statements. Get to the core content.
The above content is excerpted from the best-selling book "The Way of Cultivation of Technical People" by Huang Zhekeng, who has served as the technical director of Yihaodian, the vice president of technology of Yiyao.com, and the CTO of Haier agricultural e-commerce, etc.; he has published the best-selling book "The Top of Technical Management"; Founder of technology media "Technical Leadership", with 200,000 fans across the network; good at corporate digital transformation, large technical team management, new technology application and innovation, etc.
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