A guide to understanding your financial statements

A guide to understanding your financial statements

Financial statements are more important that you really think. It’s the scorecard of your business, and whenever you’re a small or large business owner, you need to read, analyze, and understand your financial statements so you can get an accurate findings of your finances. This guide will show you the basics in understanding your financial statements for the betterment of your business.

How to understand your Financial Statements?

1. Balance Sheet

Balance sheets provide the 3 important details about your company’s finances: Assets, Liabilities and Shareholders’ equity.

  • Assets:

These includes the things that your company owns that have a value. Assets include physical property such as equipment, supplies and inventory. It also includes trademarks and patents, and most importantly, the investments that your company makes.

  • Liabilities:

These includes the amount of money that your company owes to others. These includes like the money borrowed from a bank for creating a new product, rent fees, money owed to suppliers for materials, payroll of your company and taxes that needs to be paid. Liabilities also include obligations of your company to provide services in the future.

  • Shareholder’s equity:

It’s the amount of money that would be left if your company sold all of its assets and paid off all of its liabilities. This amount of leftover money belongs to the shareholders or the owners of the company.

Always remember that in a balance sheet, its Assets = Liabilities + Shareholders’ equity. It is also shown at the end of the reporting period and does not show the cash in and out flows of the accounts during the period.

2. The Annual Report

This is a document prepared by the company’s management which includes the progress and what happened in the business for the whole year. There are no real rules for what an annual report contains, although most annual reports begin with a shareholder letter from the Chief Executive Officer of the company. Most annual reports of the companies are posted on their websites in a PDF format or Microsoft Word document.

3. Cash Flow Statements

These statements reports the cash in-and-out flow of the company. A cash flow statement can tell you whether the company generated cash, and this is very important because a company needs to have enough money to pay its expenses and to buy other assets. It is also divided into three main parts: operating activities, investing activities and financing activities. The first part provides the company’s cash flow from net income or losses, while the second part shows the cash flow from all investing activities, which includes purchases or sales of long-term assets and also investment securities. The third part shows the cash flow from all financing activities.

4. Income statements

While the cash flow statements tells you whether the company generated cash, income statements tells you whether the company made a profit. It also shows the costs and expenses associated with earning that revenue. The bottom line of the statement shows the company’s net earnings or losses, which tells you how much the company earned or lost during the period.

Although these four are separated financial documents, bear in mind that these are all related and crucial to the financial health of your business. Understanding your financial statements will not only let you inform the company’s financial state but also how you can improve more your business to gain customers and investors as well. To have a better understanding of all these financial statements, you may hire a CPA firm or join an institute for the same.

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