How to Read Statements & Create Financial Summary?

As a CFO or CEO, you’re constantly juggling responsibilities from securing funding to making strategic decisions. In this whirlwind, financial statements can feel like a maze, but they’re your guiding light. A well-crafted financial summary is your roadmap to understanding your business’s financial health and making informed decisions. Without it, you risk missing critical insights that could lead to costly mistakes or missed opportunities.

Financial statements give you the pulse of your business, but reading them can be challenging if you’re not a financial expert. This is where a financial summary becomes invaluable. It condenses complex data into actionable insights, helping you stay ahead of potential financial pitfalls and confidently steer your company toward growth.

So, let’s dive into how to read financial statements and create a financial summary.

What are Financial Statements?

Financial statements are the backbone of your business’s financial health, offering a clear snapshot of where your company stands. They aren’t just documents for accountants; they’re essential tools that give you the insights you need to steer your business toward success. Whether you’re concerned about making informed decisions or ensuring your financial oversight is on point, understanding these statements is crucial.

There are three primary types of financial statements you’ll encounter:

• Income Statement: This shows your company’s revenue and expenses over a specific period, helping you track profitability.
• Balance Sheet: This provides a snapshot of your company’s assets, liabilities, and equity at a particular point in time.
• Cash Flow Statement: This details the cash inflows and outflows, showing how money moves through your business.

For a deeper dive into analyzing these financial statements, check out this detailed guide.

Now that you know what financial statements are, let’s explore why they’re vital to your business’s success.

What is the Importance of Financial Statements?

Whether you’re a CEO worried about cash flow or a CFO focused on cost optimization, a well-crafted financial summary from these statements provides the clarity needed for informed decisions and helps you anticipate potential financial challenges.

Here’s why financial statements are crucial:

• Internal Management: They help you track performance, manage budgets, and make strategic decisions that align with your business goals.
• External Stakeholders: Investors, lenders, and regulators rely on these documents to assess your company’s financial health and sustainability.
• Informed Decision-Making: They offer insights that guide critical decisions, from expansion plans to cost-cutting measures, ensuring your business remains on a solid financial footing.

Since these statements are crucial, you should have a clear idea of how to read them. Let’s dive into how to read and interpret these financial statements effectively.

How to Read Financial Statements?

Reading financial statements might seem daunting at first, but with the right approach, it becomes a powerful tool for understanding your business’s financial health. Whether you’re creating a financial summary for internal analysis or preparing for a board meeting, with these steps, reading your financial steps will be a breeze.

Income Statement

The income statement, often called the profit and loss statement, shows your company’s revenue and expenses over a specific period. It helps you understand how well your business is performing in terms of profitability. You need to focus on these components in your income statement.

• Revenue: Start by reviewing the top line, which shows the total sales or revenue generated during the period.
• Expenses: Next, look at the expenses, which include the cost of goods sold (COGS), operating expenses, and any other costs incurred by the business.
• Net Income: Finally, the bottom line shows the net income or profit, calculated as:

Net Income = Revenue − Total Expenses

Balance Sheet

The balance sheet provides a snapshot of your company’s financial position at a specific point in time. It lists assets, liabilities, and equity, showing what your business owns and owes. Its components are:

• Assets: This section includes everything your company owns, such as cash, inventory, and property.
• Liabilities: These are the obligations your company needs to pay off, such as loans, accounts payable, and other debts.
• Equity: Equity represents the owner’s stake in the company, calculated as:

Equity = Assets − Liabilities

Cash Flow Statement

The cash flow statement shows how cash moves in and out of your business. It’s divided into three sections:

• Operating Activities: This includes cash generated or spent on core business operations, such as sales and expenses.
• Investing Activities: Here, you’ll see cash spent on or received from investments, like purchasing equipment or selling assets.
• Financing Activities: This section shows the cash flow from financing, such as issuing shares or taking loans.

Example: If your business generated $200,000 from operations, spent $50,000 on new equipment, and took a $100,000 loan, the net cash flow would be:

Net Cash Flow = $200,000 − $50,000 + $100,000 = $250,000

Common Analysis Metrics

Understanding how to read these statements is essential, but knowing how to analyze them is where you can derive meaningful insights. Here are a few metrics to watch:

• Gross Profit Margin:

Gross Profit Margin= (Gross ProfitRevenue) × 100

This metric shows the percentage of revenue that exceeds the cost of goods sold.

• Current Ratio:

Current Ratio= Current AssetsCurrent Liabilities

This ratio indicates your company’s ability to pay short-term obligations with short-term assets.

• Debt-to-Equity Ratio:

Debt to Equity Ratio = Total LiabilitiesShareholder’s Equity

This ratio shows the proportion of debt and equity used to finance the company’s assets.

For deeper insights into reading and interpreting your Profit and Loss statement, explore our detailed analysis here.

How are Financial Statements Interconnected?

Understanding financial statements is important, but grasping how they interconnect gives you a complete picture of your business’s financial health. Each statement tells a part of the story, and together, they provide a comprehensive view that can guide your financial summary and decision-making process. Let’s explore how these statements link together.

The Income Statement and Balance Sheet Connection

The income statement impacts the balance sheet directly through net income. At the end of each period, the net income (or loss) calculated on the income statement transfers to the equity section of the balance sheet under retained earnings. This connection shows how profitable operations contribute to the company’s overall financial position.

Example: If your income statement shows a net income of $50,000, this amount will increase the retained earnings on the balance sheet.

The Balance Sheet and Cash Flow Statement Connection

The changes in the company’s assets, liabilities, and equity connects the balance sheet and cash flow statement. The cash flow statement explains these changes by detailing how cash is generated and used during the period.

Example: If there is an increase in accounts receivable on the balance sheet, this would be reflected as a decrease in cash flow from operating activities on the cash flow statement, as it indicates cash not yet received.

The Income Statement and Cash Flow Statement Connection

The net income figure links the income statement and cash flow statement. The net income from the income statement serves as the starting point for calculating cash flow from operating activities. You can make adjustments for non-cash items and changes in working capital to arrive at the net cash provided by operating activities.

Example: If your income statement shows a depreciation expense of $10,000, you can add this non-cash expense to net income in the cash flow statement under operating activities.

A Comprehensive View

By understanding these connections, you can see how changes in one statement affect the others. This interconnectedness ensures that your financial summary provides a holistic view of your business’s performance, allowing for more accurate forecasting and strategic planning.

To understand more about how different financial statements connect and the role of trial balances in ensuring accuracy, read our detailed article here.

With this knowledge, you’re now ready to dive into how to analyze these financial statements for deeper insights.

How to Analyze Financial Statements?

Analyzing financial statements is where the data comes to life, revealing insights that can drive strategic decisions and improve your business’s financial health. Whether you’re looking to assess profitability, manage cash flow, or plan for future growth, a thorough analysis of your financial summary is essential. Here’s how to approach it.

Creating a Financial Model

The first step in analyzing financial statements is to build a financial model that integrates the income statement, balance sheet, and cash flow statement. This model allows you to project future performance based on historical data and key assumptions.

• Step 1: Start with historical data from your financial statements.
• Step 2: Use this data to forecast future revenues, expenses, and cash flows.
• Step 3: Adjust your assumptions to test different scenarios and their potential impact on your financial health.

Three Types of Financial Statement Analysis

There are three primary methods to analyze financial statements, each providing unique insights:

• Horizontal Analysis: This method compares financial data over multiple periods, highlighting trends and growth patterns.
  • Example: If your revenue grew from $1 million in 2022 to $1.2 million in 2023, the horizontal analysis would show a 20% increase.
• Vertical Analysis: This approach breaks down each financial statement into a percentage of a base figure, making it easier to compare across periods and with other companies.
  
  • Example: If your gross profit is $200,000 on revenue of $1 million, the vertical analysis would show a gross profit margin of 20%.
    
• Ratio Analysis: Ratio analysis involves calculating key financial ratios that measure aspects like profitability, liquidity, and solvency.
  
  • Example: The Current Ratio formula is:

Current Ratio= Current AssetsCurrent Liabilities

A ratio above 1 indicates that your company can cover its short-term liabilities with its short-term assets.

For a strategic approach to analyzing financial statements and improving your financial processes, explore our in-depth guide on strategic finance Before and After Bunker.

Steps and Ratios to Focus On

To conduct a comprehensive analysis, focus on key ratios and metrics that align with your business goals:

Profitability Ratios

1. Net Profit Margin

The Net Profit Margin measures how much profit your company generates for every dollar of revenue. It indicates the efficiency of your business in converting revenue into actual profit.

• Formula:

Net Profit Margin=Net IncomeRevenue × 100

• Example: If your company has a net income of $50,000 and revenue of $500,000, the Net Profit Margin would be:

Net Profit Margin = 50,000500,000× 100 = 10%

2. Return on Equity (ROE)

ROE measures how effectively your company is using its equity to generate profit. It’s a critical ratio for investors, as it shows the return they can expect on their investment.

• Formula:

ROE=Net IncomeShareholder’s Equity × 100

• Example: If your company’s net income is $50,000 and shareholders’ equity is $250,000, the ROE would be:

ROE=50,000250,000×100=20%

Liquidity Ratios

1. Current Ratio

The Current Ratio assesses your company’s ability to pay its short-term obligations with its short-term assets. A ratio above 1 generally indicates a healthy liquidity position.

• Formula:

Current Ratio=Current AssetsCurrent Liabilities

• Example: If your company has $150,000 in current assets and $100,000 in current liabilities, the Current Ratio would be:

Current Ratio=150,000100,000=1.5

2. Quick Ratio (Acid-Test Ratio)

The Quick Ratio measures your ability to meet short-term liabilities without relying on inventory sales. It’s a more stringent test of liquidity than the Current Ratio.

• Formula:

Quick Ratio=Current Assets – InventoryCurrent Liabilities

• Example: If your company has $150,000 in current assets, $50,000 in inventory, and $100,000 in current liabilities, the Quick Ratio would be:

Quick Ratio=150,000−50,000100,000=1.0

Solvency Ratios

1. Debt-to-Equity Ratio

The Debt-to-Equity Ratio shows the balance between debt financing and equity financing in your company. It’s an important indicator of financial stability and risk.

• Formula:

Debt to Equity Ratio=Total LiabilitiesShareholder’s Equity

• Example: If your company has $200,000 in total liabilities and $250,000 in shareholder’s equity, the Debt-to-Equity Ratio would be:

Debt to Equity Ratio=200,000250,000=0.8

2. Interest Coverage Ratio

The Interest Coverage Ratio measures your company’s ability to pay interest expenses on outstanding debt. A higher ratio indicates better financial health.

• Formula:

Interest Coverage Ratio=EBITInterest Expenses​

• Example: If your company’s EBIT is $80,000 and interest expenses are $20,000, the Interest Coverage Ratio would be:

Interest Coverage Ratio=80,00020,000=4.0

These ratios help you understand different aspects of your business’s financial health, from profitability and liquidity to solvency. They are essential tools for analyzing financial statements and making informed decisions that align with your strategic goals.

For a deeper dive into the critical steps and ratios involved in financial planning and analysis, check out our comprehensive guide here.

With these ratios in mind, you’re now better equipped to create a financial summary that highlights key insights and guides your business strategy. Let’s move on to how you can create an effective financial summary.

How to Create a Financial Summary?

Creating a financial summary is about turning detailed financial data into a clear, actionable report that guides strategic decisions. Whether you’re preparing this for a CFO, senior leadership, or investors, the goal is to provide a concise yet comprehensive overview of your company’s financial health. Here’s how to do it effectively.

Steps to Populate and Verify a Financial Model

1. Start with a P&L Walkthrough:

Begin by thoroughly reviewing the Profit and Loss (P&L) statement. This involves comparing the current month’s actual figures to those from the previous month and the same month in the prior year. By doing so, you can spot trends and fluctuations that could indicate either opportunities or risks.

For example, if revenue has dipped compared to the previous month, you’ll want to investigate whether this is due to a seasonal downturn, changes in customer behavior, or operational issues. Similarly, an increase in expenses might signal rising costs that you need to address.

2. Assess Percentages:

After reviewing the absolute numbers, the next step is to calculate each line item as a percentage of total revenue. This practice helps in understanding the relative significance of each expense or income category.

For instance, if your cost of goods sold (COGS) consistently represents 40% of your revenue but suddenly jumps to 50%, this percentage analysis will highlight the shift, prompting further investigation.

3. Identify Material Variances:

Material variances are the significant differences between actual figures and what was expected (whether compared to the previous period, the same period last year, or the budget). Identifying these variances is critical for effective financial management.

For each material variance, dive into the root cause. For example, if your marketing expenses have spiked, determine whether this was due to a one-off campaign or a new ongoing strategy. By understanding the drivers behind these variances, you can decide whether they represent a temporary blip or a trend that you need to manage.

4. Compare to Budget:

If you have a budget in place, comparing the actual figures to your budgeted amounts is a vital step in the financial analysis process. This comparison helps you assess how well your company is performing against its financial goals.

For example, if your budget projected $500,000 in revenue for the month but you only achieved $450,000, this $50,000 you need to examine the shortfall.

5. Prepare Insights:

After analyzing the P&L, percentages, material variances, and budget comparisons, the next step is to summarize these findings in a clear, concise report. This summary typically includes key metrics such as revenue, gross margin, and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Focus on identifying the “needle movers”—those factors that had the most significant impact on financial performance. For example, if a reduction in supplier costs boosted your gross margin, highlight this as a key contributor to profitability.

Step-by-Step Guide to Write a Financial Summary

1. Introduction:

Start your financial summary with a brief overview of the analysis period. Mention any significant events that impacted the financials, such as a new product launch, market expansion, or changes in operational strategy. For example, if your company introduced a new product line that contributed to an increase in revenue, this should be highlighted upfront.

2. Key Metrics Overview:

This section presents the most important financial metrics, such as revenue, gross margin, EBITDA, and net income. Use tables or bullet points to make these figures easy to digest. For instance, you could present a table that shows revenue, gross margin, and EBITDA for the current month, the previous month, and the same month last year.

3. Variance Analysis:

Dive deeper into the material variances identified during the P&L walkthrough. For each significant variance, explain the reasons behind the change and how it impacts overall performance. For example, suppose there was a significant increase in marketing expenses. In that case, you might explain that this was due to a strategic investment in a new advertising campaign aimed at driving future growth.

Check out this tutorial on how Bunker helps in variance analysis.

4. Comparison to Budget:

Include a comparison of actual figures to the budget, highlighting areas where the company performed above or below expectations. This section should not only present the differences but also provide an analysis of why these differences occurred. For example, if operating expenses were lower than budgeted, explain whether this was due to cost-saving initiatives, delayed expenditures, or other factors.

5. Conclusion and Recommendations:

Summarize the key takeaways from the analysis, highlighting the most important insights and trends. Provide actionable recommendations based on these insights, such as suggesting areas where you can reduce costs, make investments, or adjust strategies. For example, if your analysis shows that increasing supplier diversity could reduce costs, this should be included as a recommendation.

Using Historical Data Trends for Forecasting Future Performance

1. Trend Analysis:

Review historical data to identify consistent patterns, such as seasonal sales fluctuations, rising operational costs, or recurring revenue spikes. For instance, if you notice that sales tend to dip in the summer months, you can plan to mitigate this impact, perhaps by launching targeted promotions during this period.

2. Scenario Planning:

Use your financial model to run different scenarios, testing how changes in key variables—such as sales growth, cost of goods, or interest rates—might impact your business’s future financial health. For example, you might model the financial impact of a 10% increase in raw material costs and see how this would affect your gross margin.

3. Strategic Recommendations:

Based on your trend analysis and scenario planning, offer strategic recommendations to guide the company’s financial planning. For example, if your forecasts indicate that cash flow could be tight in the coming months, you might recommend tightening credit terms with customers or securing a line of credit.

To learn more about the role of a financial controller in creating accurate financial summaries, explore our detailed article here.

Bunker’s automated tools can take your financial analysis to the next level, making this process faster, more accurate, and easier to manage. Let’s see how.

How Bunker Automates Financial Analysis?

Spending hours diving into spreadsheets? Cut down those hours to minutes by using Bunker. Bunker transforms the tedious process of financial analysis into a streamlined, efficient experience, providing you with real-time insights and automated precision so you can focus on making strategic decisions rather than getting lost in data.

Cross-Tracking Across Regions

Managing financial data across multiple regions can be a nightmare, especially during complex processes like vendor migration. Bunker’s cross-tracking feature simplifies this by offering detailed tracking of cost savings and financial shifts across different regions.

• Example: If your company switches a significant supplier in the U.S. while maintaining another in Europe, Bunker provides a clear comparison of the cost implications in both regions, ensuring you make the most cost-effective decisions.
• Impact: By using Bunker, you can confidently manage vendor migrations, knowing that you’re optimizing costs across the board without the risk of overlooking regional differences.

Enhanced Financial Visibility

Financial visibility is crucial for making informed decisions, but achieving it across multiple entities and regions can be daunting. Through its Cost Mix Shifts Analysis, Bunker offers a real-time, in-depth analysis that breaks down costs by category, giving you the clarity you need.

• Example: Suppose your company operates in Singapore, Indonesia, and Hong Kong. Bunker’s analysis reveals that labor costs in Singapore have increased due to market demand, while material costs in Indonesia have spiked due to supply chain disruptions.
• Impact: With these insights, decision-makers can strategize cost reallocation or negotiate better deals for materials in Indonesia, optimizing overall expenses.

User-Friendly Interface

Bunker’s user-friendly interface makes financial analysis not only efficient but also autonomous, allowing you to detect errors and streamline budgeting with ease.

• Intuitive UI for Error Detection:
  • Problem: Manually identifying errors in financial data is time-consuming and prone to mistakes.
  • Solution: Bunker’s intuitive user interface flags anomalies, such as significant cost deviations, making error detection quick and straightforward.
• Simplified Budgeting:
  • Problem: Budgeting often suffers from underestimation due to a lack of visibility into all necessary line items.
  • Solution: Bunker simplifies the budgeting process by providing visibility into historical spending trends, ensuring detailed and accurate budgets without the risk of under-budgeting.

Check out this tutorial on Bunker’s platform overview.

How Bunker Helps in Creating a Financial Summary?

Bunker doesn’t just analyze data; it transforms it into actionable insights that power your financial summary, ensuring accuracy and clarity in every report.

• Real-Time Dashboards

Bunker’s real-time dashboards provide a dynamic view of your Profit & Loss (P&L) statements, vendor management, and other key financial metrics.

• Example Case: Imagine tracking changing trends in vendor concentration, identifying the impact of a reversal transaction, or catching untagged transactions. Bunker highlights these issues in real time, allowing you to incorporate them into your financial summary effortlessly.
• Impact: This level of detail ensures that your financial summaries are not only precise but also insightful, empowering you to make decisions that drive your business forward.
• Financial Accuracy

Inaccuracies in financial reporting can lead to poor decision-making and lost opportunities.

• Solution: Bunker’s tools ensure accuracy in financial reporting by providing detailed reports on changing trends, vendor concentration, and more. This includes a comprehensive view of P&L, vendor dashboards, and other critical financial data.
• Impact: With Bunker, your financial summaries will always be accurate and up-to-date, making them a reliable foundation for strategic decision-making.

Ready to experience how Bunker can revolutionize your financial analysis and create more precise financial summaries? Start your 14-day free trial now—no credit card required—and see how Bunker can empower your business with real-time financial visibility and precision.