How to Understand Your Financial Statements

One common misconception is that it is hard to read a financial statement. Financial statements, however, can be read and understood by almost anybody. People just need to take the time to know how to read them.



 

Financial statements are extremely necessary to businesses big and small. Without them, you wouldn’t be able to make important decisions such as secure loans or invest in crucial assets.
 
Financial sheets are made up of three parts:
 
The balance sheet
The income statement
And the cash flow statement.
 
Balance Sheet
 
The balance sheet is a documentation of where you are financially. It will tell you how much money you have and where it is stored, at the time of the statement that it is issued. Balance sheets are divided into three categories: assets, liabilities, and equities.
 
Assets are your current funds available to use in your bank account. Liabilities are funds that you owe to other people and companies, such as Global Debt Recovery. Because you are obliged to give this money, it is not money that is considered part of your asset. Equity is money that is held currently by your company, money that you likely do not want to use to spend.
 
The three go hand and hand with one another, however. Whatever money your business has in assets will consist of what it has stored up in equity minus whatever you may owe to other parties in liability.
 
Income Statement
 
Your income statement focuses on two things: Your company’s revenue and its expenses. Revenue is how much you make, and expenses are how much you spend. When subtracting your expenses from your revenue, you have a gross profit. When you subtract your gross profit from your operating expenses (which include employee payroll, insurance costs, utilities, etc.), you have a net profit. After you find out your net profit, you will realize how successful your business is.
 
However, even if your product or services sells extremely well, it would not necessarily mean our business would. You could sell out of your product fast, but if you spend so much on advertising, breaking even will turn into an uphill battle.
 
The Cash Flow Statement
 
The cash flow statement determines how much money you have in cash form, compared to how much of it is in the form of credit. If you have balance sheets and income statements that track your outgoing and incoming money regardless if the cash is on hand, a cash flow statement is absolutely necessary.
 
For instance, if a company owes you money, that money would appear in your revenue on your income statement, even if that money hasn’t been given to you yet. Businesses that use cash basis accounting will only document transaction once the money is officially received. It is highly recommended for every small business.
 
Once you are used to reading and reviewing financial statement, you can pick up on how to manage your money wisely. This means you can keep an eye on which funds go where, whether towards equity or Global Debt Recovery. You can also create some opportunities on how you can take your company in the right directions moving forward.
 
You can get help from financial software, or prepare your own financial statements, as long as you monitor your finances diligently. If you do not have a bookkeeper, this would be a good time to consider hiring one in order to leave you to more important work when the occasion arises. When it is the time to pay taxes, you will want a financial statement that is 100 per cent flawless.

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