Understanding Financial Statements
The value of the accurate financial statements
generated is undisputed. This is as financial statements are like windows
into the health of a company. Just by viewing financial statements, adept
business owners will be able to determine the strengths and weaknesses
at the time that the statement was generated. With this, the owner can
then chart the way into the future for the company, by addressing the weaknesses
and capitalizing on the strengths that the company has.
The two main financial statements within
any company are the balance sheet and the Profit and Loss statements. The
balance sheet provides anyone with a snapshot of the assets and liabilities
within a company at any one point in time. This essentially means that
the balance sheet shows what the company has and how much they own others.
Apart from that, the equation asset = liabilities + capital always holds
true within a balance sheet. The liabilities and capital sections indicate
the sources of funds for the company while the assets indicate how the
company uses the funds that it has. Most importantly, the liability and
capital sections indicate money owed to creditors as well as invested amount.
If you look closely, you will realize that both of these are obligations
of the company that need to be paid.
By analyzing financial ratios that are
generated by numbers on a balance sheet, a business owner is able to tell
how well the company collects their accounts receivables, how fast the
inventory is moving out and replenished, as well as how much exposure the
company has towards debt.
The typical company balance sheet will
consist of fixed assets and current assets such cash, account receivables,
inventory and note receivables. Current assets comprise of assets that
can be liquidated fairly quickly and easily in order to be turned into
cash. On the other hand, fixed assets are amortized over an extended period
of time and are not so easily sold to recover cash.
On the liability section, fixed liabilities
include long-term debt of usually more than 12 months of age or contingent
liabilities. The current liabilities however are represented by mainly
accounts payable and notes payable as well as short term loans. If there
is inadequate cash within the company, current liabilities have the ability
to drag the company down.
The final element of the balance sheet,
the Equity is the amount of capital financing that has been injected into
the company. With this, the owner s investment into the business is shown
in the balance sheet.
The Profit and Loss statement is used to
determine if a company is making a profit or a loss within a specified
operations period. The revenue obtained in a period is stated in this statement,
and all direct and indirect costs incurred are deducted from the revenue.
With this, the profit for that period is obtained, where profits are compared
with the previous year s performance level. Profits with which taxation
has not yet been accounted for are known as gross debt, while net profits
are debt in which all costs have been deducted from.
In conclusion, being able to read financial
statements is an advantage for any business owner. Interpreting financial
statements are ever important in business, as it allows for the owner to
take action before things become worse. By reading financial ratios, a
business owner will know what needs to be done before the situation of
the company changes. Alternatively, reading financial ratios will also
help the business owner plan for the future, by incorporating the leverage
on existing strengths of the company.
Author-Bio: Matt Bacak |
