Understanding financial statements
Financial statements are not just some mere documents- it is very vital to the success and growth of your business. When you know how to interpret these financial statements, chances are, you’ll know how to decide intelligently in investing and overall accounting of your business.
Here are five things that you need to know about your financial statements and how it will help you.
1. It informs the financial condition.
This is very important especially for your investors and creditors. Financial statements provides a clear and detailed information of the company’s asset investments. The balance sheet includes the company’s outstanding debt and equity components, which will help investors understand their positions in the company’s capital.
2. It indicates the Cash Flow
Cash flow statements, which are indicated in your financial statement is important because it shows the exchange of cash between your company and external sources during a period. By this, your investors will know if your company has enough money to pay for expenses and other purchases.
3.These are scorecards
According to Robert Follet’s “How To Keep Score In Business”, your business must score with dollars, and the scorecard is your financial statement. He also added that “a lot of people don’t understand keeping score in business. They get mixed up about profits, assets, cash flow and return on investment.” Monitoring your financial statements is the same as monitoring how your business earn and determine if its below average, average or outstanding.
4. Operating results
In financial statements, there are income statement reports that includes operating results such as sales, expenses and profits or losses. Using the income statement, investors can evaluate a company’s past income performance and assess the future cash flows of the company.
5. The shareholder’s equity
This statement is important to equity investors because it shows the changes in equity components during a period. The amount of shareholders’ equity is a company’s total assets, representing the whole company’s net worth. A steady growth in a company’s shareholders’ equity means the accumulation of investment returns for current equity shareholders.
Understanding and analyzing financial statements is a vital tool for every business owner and entrepreneur for the growth and success of the company, big or small. The key to understand this financial statements is by analyzing every financial amount and its cause and effect on your business-and also to the investors as well.