Understanding Financial Statements
Menaye Finance Tips
Balance Your Books: List what you own (assets) and owe (liabilities) to see your company’s net worth.
Track Your Earnings: Record all income and expenses to find out if you’re making a profit or loss.
Follow the Cash: Monitor cash flow from operations, investments, and financing to keep your business liquid.
Understand Your Finances: Use financial statements to evaluate your business’s health and make informed decisions.
Financial statements are essential tools for evaluating a business’s financial health, providing insights into business performance, profitability, and financial position.There are three primary financial statements:
Balance Sheet: Assessing Financial Position
What It Shows: A balance sheet presents a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific date. It reflects the company’s net worth on that day.
Key Components:
Assets: These are what the company owns, such as cash, inventory, and equipment.
Liabilities: The company owes these, like loans and unpaid bills.
Shareholders’ equity: refers to the difference between assets and liabilities and represents the owners’ stake in the business.
How to Prepare: To create a balance sheet, make a detailed list of all assets and liabilities your business holds as of a specific date, typically the end of a month or quarter. Assign a monetary value to each item. The total value of assets must equal the combined value of liabilities and shareholders’ equity.
Income Statement: Measuring Performance
What It Shows: This statement outlines a company’s revenue, expenses, and net profit or loss over a specific period (like a month or year).
Key Components:
Revenue: Income from sales of products or services.
Expenses: Costs incurred in operating the business, such as salaries and rent.
Net Profit/Loss: The difference between revenue and expenses. A positive value indicates profit and a negative value indicates a loss.
How to Prepare: Record all business income and expenses during the period. Subtract total expenses from total revenue to determine the net profit or loss.
Cash Flow Statement: Tracking Liquidity
What It Shows: This statement shows how cash is used in operations, investments, and financing activities by tracking cash flows into and out of the business.
Key Components:
Operating Activities: Cash flows generated from or used in the core business operations, such as sales of goods or services, receipt of interest or dividends, and payments to suppliers and employees.
Investing Activities: Cash flows related to the purchase and sale of long-term assets and investments, including property, equipment, and marketable securities.
Financing Activities: Cash flows from transactions with creditors and investors, such as borrowing money, issuing stock, repaying loans, and paying dividends to shareholders.
How to Prepare: Categorise and record all cash coming into and going out of your business from its day-to-day operations, investments in assets, and financial transactions like borrowing or issuing stock.