How To Understand And Use The Financial Statements

Running a business is a complicated job. It is not based on luck but dedicated knowledge, effort, and skills. It is a continuous process of adjusting to the trends, learning, and taking risks. A successful business roots from understanding how your company and the industry you’re in operate to develop a more effective strategy. And one way of doing that is by figuring out your financial statements. 

Financial statements are written and formal records of a business’s economic activities. This document provides a picture of your company’s financial health. Every entrepreneur, investor, and manager must possess the ability to understand their business’s financial statements. With this skill, investors can identify opportunities, while entrepreneurs and managers can develop more efficient strategies and decisions.

In a business, there are usually three major reports, and those are the: statement of financial position, income statement, and the statement of cash flows. Each of these records has different contents that require full attention. Learning each of these financial reports could help stakeholders and business owners alike to have a clear view of the company’s financial condition and guide towards making appropriate actions. 

The first financial record is the financial position statement. This is a balance sheet of all of your company’s resources and how they were financed. This list shows all your business’s assets, liabilities, and capital. The statement of financial position also provides valuable insights on how your company can meet its financial obligations. 

The second one is the income statement. This is where you can find the summary of the cumulative effect of the accounting period’s revenues, gain, expenses, and loss transactions. This is where you’ll know whether or not your company was successful in deriving revenue and profit from its operations. 

Lastly, there’s the statement of cash flows. The cash flow statement is where you can see how the cash is moving in your business. Operating, financing, and investing are the three main cash flows that should be seen in this report. The categories enable you to observe the impact of each step you will take on cash utilization. 

Understanding your financial statements is indeed a challenging job. This is why it would be better to seek help from the best accounting software for small business that will not only help you with your financial statements but can function as an invoice maker as well. And to help you more on understanding your financial statements more, you can read this infographic by KIPPIN. 

How to Understand and Use the Financial Statements