What are the three key financial statements?

Financial statements record an agency’s financial activities and convey the agency’s financial health. Financial statements are often audited by accountants to ensure their accuracy and are prepared in accordance with a specific set of accounting rules called Generally Accepted Accounting Principles (GAAP). GAAP ensures that financial statements are consistent and comparable across agencies. 

In some instances, agencies are required to follow GAAP in preparing their financial statements. For example, the financial statements that are submitted with hospice cost reports must be prepared in accordance with GAAP.

An agency’s financial statements describe the results of the agency’s operations and provide information about the agency’s assets and liabilities, revenues and expenses as well as cash flow activities. Together, this information provides a picture of the agency’s financial health and activities and can be used to monitor agency performance over time. An agency’s financial statements can also be used to support decision-making.

There are three key financial statements

The three key financial statements are the balance sheet, the income statement, and the cash flow statement.

The balance sheet provides a snapshot of the agency’s financial health at a given point in time. It lists the agency’s assets and liabilities as of the last day of a specified period, also known as its capital structure. The balance sheet will usually be produced on a quarterly basis.

The income statement, also known as the profit and loss statement, provides information on all the agency’s revenue and expenses during a specified period. The income statement is usually prepared quarterly, often as an aggregation of internal monthly ledgers, and is used to review revenue and expenses over the period. Subtracting expenses from revenues results in the agency’s profit, also called the net income.  

The cash flow statement details cash inflow and outflow over a specified time period. Cash flow statements are generally prepared quarterly and are separated into operating activities, investment activities, and financing activities. The cash flow statement, which tracks how the agency uses its cash over a period of time to fund operating expenses and investments and pay off its debt obligations, provides a view of the agency’s liquidity and cash sources and uses, which can provide insight into the ability of the agency to generate sufficient cash to support its operations over the near- and long-term horizon.

How can an agency director use financial statements?

Financial statements are critical to assess the financial viability of an agency, its capital structure, income generation and cash flow needs.  Financial statements can also be used to measure the impact of initiatives on the agency’s bottom line. Compare direct expenses to revenue, as reported on the income statement. Did revenue increase? Were expenses reduced? How did the net income compare to expectations?

Financial statements also provide information on agency spend and cash flows and can provide insight into how cash uses are allocated. Periodically reviewing expenses, when necessary on a line by line basis from the relevant internal ledgers, can provide visibility into potentially unnecessary costs and areas where expenses can be reduced and spend can be reallocated to more productive areas.

Analysis of financial statements can provide an overall agency view of revenue and expenses, identifying how different areas in the agency are contributing to overall financial performance.  This can support discussions with different area leads on goals and budgeting and helps management reassess overall agency performance. Financial statements can also be used to motivate and engage the agency’s teams. The income statement can show employees how their activities impact revenue, providing them with an understanding of how they can directly impact agency financial health. Remember, only a financially strong agency can deliver improved patient services and higher quality of care.

Where can you find out more?

Financial statements as a management tool

Business owner perspective on financial statements