Using a Financial Statement to Determine a Company's Room for Growth

Using a Financial Statement to Determine a Company's Room for Growth

Financial statements are a key part in determining the successfulness of a company. A positive financial statement could also be the driving force for a small business to expand its market.For example, let's say that you own a small engineering firm that specializes in the design of electrical transmission and collection lines for renewable energy systems. When you started the firm the majority of your work load was for clients or projects on the West Coast so you established your office in Portland, Oregon. However, your firm has continued to grow and is expanding to clients and projects in the Mid-West and Northeast. With the growth in other regions you start to realize that traveling to clients is becoming expensive and time consuming. You contemplate opening another office to handle the new regions but you aren't sure if the cost of expanding will be covered with the additional business. At this point you should go over your financial statement to see if in fact the new office makes financial sense.

In order to start the financial statement you need to create a balance sheet. The balance sheet will give you an overall financial position of your company and is determined by the equation below:

Assets - Liabilities = Owners' Equity

Assets are the amount of resources owned by your company while the liabilities are the amounts that you own to other entities. Owners' equity could also be referred to as the net worth of your company and will be used to determine the overall financial status of your company.

Your assets can be broken down into several components such as cash, accounts receivable and equipment. Cash would be the amount of money that the company has on hand and in bank accounts. Accounts receivable would be the amounts owed to your company from other clients. Equipment would be everything that was purchased in order for your firm to operate.

For an engineering firm your main liabilities would be accounts payable, accrued liabilities and short or long term debts. Accounts payable would be the amount owed to suppliers while accrued liabilities would mostly be the wages for your employees. Your short or long term debts would consist of any loans that were taken out in the company's name for start up costs, whether it will be paid off within one year (short-term) or extended payments for several years (long-term).

In order to figure out your companies net worth you will have to go through an income and cash flow statement. Those will determine the correct amounts to input into your assets and liabilities columns. Let's start with the income statement. Here you will determine if your company operates under enough profit to support the expansion to a new office. The first amount that you look for in an income statement is your gross profit. Since you are selling a service and not a particular good then you can consider your net sales from clients as your gross profit. Then you will deduct your general business expenses, which would include employee wages, traveling expenses or office building lease, to get your income from operations. After that you can deduct your interest expenses (the costs of using borrowed money) and income taxes to get your overall net income.

Your net income can now be used to determine your cash flow statement. You start this by adding your net income with the increase in accounts receivable, increase in supplies, increase in current liabilities and depreciation expenses to get your net cash from operating activities. Next you will add/deduct the cash paid for investing activities, which would include equipment or other long-lived assets. Finally you add in your cash flows from financing activities, which include sales of long term debt, stocks or dividends paid to investors. This will get you to your overall net increase in cash for the year.

Now that we have your net income and cash flow you can make some evaluations on the additional costs of a new office. A quick assessment can be done to alter your potential operating costs with the additional employees needed, rental agreements for the office space and start up costs for all supplies. Deductions could also be made for traveling expenses since you will now be closer to your clients. You can also adjust your net sales to include the projected revenue from additional projects that will be taken on. If your net income remains positive or even increases than the new office is looking more like a positive solution.

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