Chapter 8
Understanding Financial Statements
In This Chapter
Understanding the financials necessary to value a business
Seeing how a balance sheet works
Knowing what an income statement does
Understanding how cash flow works and translates into value
Recognizing key valuation ratios
In the first part of this book, we tell you that valuation isn’t all about the numbers. But frankly, neither you nor a valuation professional can do valuation without the blasted things. We’re going to make an assumption that you’re not experienced in accounting (and point you toward a great title to rectify that situation: Accounting For Dummies, 4th Edition [Wiley]). But all we really focus on in this chapter are the basic sources of financial data necessary to measure the financial performance of a business and, therefore, the numbers necessary to do a valuation.
We talk about how important these numbers are in judging the short- and long-term health of a company you’re considering buying or investing in. The chapter’s a good primer for starting a business from scratch as well.
These reports are easy to get if you’re looking at a public company, but for private companies, you usually have to present yourself as an interested party in a possible transaction, and very likely, you’ll have to sign a confidentiality agreement to get access to this information in the due diligence process, which you find out about in detail in Chapters 12 and 16.
