subject: Improving Your Understanding Of Financial Statements [print this page] Knowing the workings of financial statements is important if you want to be successful in business. We have created a very quick, yet comprehensive guide to some of the most important reporting statements you would need in your trek to business success.
What follows are the three financial statements considered to be the most important for young or up-and-coming entrepreneurs, according to most experts in the field of Financial Accounting - Reporting:
The Statement of Financial Position or the Balance Sheet
The Profit & Loss Statement - in other words, an Income Statement.
The Statement of Cash Flow.
By viewing a business' Balance Sheet, you are given access to its assets, liabilities and equities thereof. This gives you a slice of business life at any given time of a business' lifespan - an indicator of its pecuniary health. That is why when you see one, it says something like, The Statement Of Financial Position as at dd/mm/yyyy.
The Balance Sheet differs from the Profit and Loss Statement - the former is a slice of financial life and a financial health check of sorts for a certain time frame, while the latter is more of a listing of income and expenses during that time. You will know a Profit and Loss Statement if it reads e.g. Profit and Loss Statement for the Year 200X.
The Statement of Cash Flows summarizes the 'cash' effects of the activities of a business for a period of time. You would normally find operating, financing and investing expenses on here. The keyword to emphasize in the above definition is the word 'cash'. It only records activities that involved the transfer of cash.
For your ease of reading:
The Balance Sheet would detail your tangible properties and whether you contributed them, borrowed them or bought them.
Your Profit And Loss shows you how much you are expending each period and how much you are earning.
The Statement of Cash Flow is your guide to the activities related to, but not limited to operating, investing and financing, as long as cash is involved.
Because freelance business people would likely want to keep a close eye on their financial activities, the Profit and Loss statement would be the best statement to prioritize, as it would include a detailed list of expenses and income for a certain period. Take a look at the revenue items there to know which activity is bringing in money and take a look at the expense items to see which ones are costing you the most and ask yourself whether those expenses are really necessary. That is, how to become more cost-efficient?
Costs are what any entrepreneur has to control at the start of every business. Every cost must be closely screened and not escape your watchful eye. Unjustified costs are frivolous and must be avoided. Every dollar counts. The money you fail to track is money flushed down the commode which could have otherwise been put to use productively.
by: Samuel Lasater
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