Most veterinary businesses can operate very effectively using three financial statements; the income statement (also called the profit and loss statement), the cash flow statement, and the balance sheet.
- The purpose of the income statement is to show whether the company made or lost cash, and how much cash, from providing veterinary services and products during the period being reported.
- The purpose of the cash flow statement is to show what was done with the cash generated by the veterinary business as well sources and uses of cash generated from non cash assets located on the balance sheet during the period being reported.
- The purpose of the balance sheet is to show, on a specific date/time, what the veterinary business has to show for all of its efforts on a specific date/time. The balance sheet reports liabilities (debt) and two types of assets, cash and non cash assets.
Once you understand these three financial statements, you know the following things:
INCOME STATEMENT/P&L- during a period of time
how much cash was generated or lost by your veterinary company
CASH FLOW STATEMENT- during a period of time
how the cash was used during a period of time
how non cash assets became sources or uses of cash during a period of time
BALANCE SHEET- on a specific date/time
what assets you have to show for the activities of the veterinary business
what liabilities you have to show for the activities of the veterinary business
what the owners equity is in the company
Income Statement or Profit and Loss (P&L) Statement
The Income Statement is the financial report most commonly used in veterinary businesses. Keep in mind that the income statement only tells part of the financial story. An income statement is a type of summary flow report that lists and categorizes the various revenues and expenses that result from operations during a given period - a year, a quarter, or a month.
The difference between revenues and expenses represents a company's net income or net loss. The amounts shown in the income statement are the amounts recorded for the given period - a year, a quarter or a month. The next period’s income statement will start over with all amounts reset to zero.
The income statement only shows the amounts earned or expensed during the period in question.
The cash flow statement shows how the income (cash) was used and the balance sheet shows accumulated balances since inception,
Cash Flow Statement or Statement of Cash Flows
A cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents. I look at a cash flow statement as a record of what you did with the cash generated by operating your veterinary business, and what cash was generated or used by assets on your balance sheet.
Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements.
A company’s balance sheet serves the same purpose as a personal net worth statement. When you apply for a loan, if you don’t provide one, the bank will develop a personal net worth statement for you or for your family. The calculation adds the amount of cash you hold to the value of your non-cash assets and subtracts your total debt, yielding your net worth.
The balance sheetfor a company is based on the “accounting equation”: assets = liabilities + owners' equity. Doing some basic algebra, the equation is also expressed as assets – liabilities = owner equity. The balance sheet reports everything the company owns (assets), everything the company owes (liabilities) and the value of the ownership stake in the company (shareholders' equity, or capital). Shareholder equity or owner equity is very like personal net worth.
The balance sheet date is a snapshot of the ending date of the period or year. It is a continuation of the amounts recorded since the inception of the company or organization. The balance sheet is a report of the financial position of the company at the balance sheet date and shows the accumulated balance of the accounts. Assets and liabilities are separated between current and long-term, where current items are those items, which will be realized or paid, within one year of the balance sheet date. Typical current assets are cash, prepaid expenses, accounts receivable and inventory.
The statement of retained earnings shows the amount of accumulated earnings that have been retained within the company since its inception. At the end of each fiscal year-end, the amount of net income or loss is added to the opening amount of retained earnings to arrive at the closing retained earnings. Retained earnings can be decreased by such items as dividends paid to shareholders. Negative retained earnings are the result of taking out more dividends than the company had cash to distribute.