Financial statements – the pulse of all businesses
Companies don ‘t just fold up suddenly. They do so gradually. They eventually fold up if the management fails to see the signs and reverse the course of the company soon enough. Due to how big and complex some companies are, when they start struggling, it is usually not obvious until it is too late.
However, management can find out early enough if they study the financial statements of the company. As they say, figures speak. So, you must study the financial statement of your company regularly. When there is problem, you will find out first from the statements.
So, what exactly are financial statements? They are statements that show how capital is spent, what is left in the system, your liabilities and how much you are being owed. It is from these statements that you will determine your profit. When a firm begins to have a problem, it usually starts with either a drop in sales or a drop in profit or both. If nothing is done to reverse the situation, it gets to the level that the profit will no longer cover your overheads.
Unfortunately, if you don’t study your financial statements regularly, you may not be able to notice these problems at the earliest stage. Remember, a problem identified is a problem half solved but without comprehensive and accurate financial statements, you may not identify the problem.
Types of financial statements
There are three major types of financial statements: Balance Sheet, Income Statement, and Cash Flow Statement. The balance sheet shows your company’s financial position at the end of a specified period. It is comprises assets, liabilities, and shareholders’ equities.
Income statement shows how much revenue you earned over a certain period of time. This is very important because you can determine how much profit or loss your company made within that period. You will get your net income when you deduct your expenses and losses from your total revenue.
Cash flow statement shows how cash flows in and flows out. It is used in conjunction with income statement as there may be cash flows that the income statement fails to capture.
Financial numbers to focus on
In your financial statements, you should focus on certain figures. You must take the time to study everything about cash flow, net income, profit & loss, sales figures, price points, gross margin, and total inventory.
In conclusion, you must understand that studying and understanding your financial statements is a mere a means to an end. It is not an end itself. You need it to monitor the growth of your company and when there is a problem, it will help you detect the problem early and seek solution.
Your company may fail to yield enough profit because your products are underpriced or because you are not producing enough quantity. It could also be that you are overstaffed. Whatever the case may be, you need to study your company’s financial statements promptly so that you can detect the problem early.
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