If you own a business that you must know your financial situation from time to time, will you make a suitable profit? Is the company's value increasing or decreasing? Which larger exchange items should be rationalized or profit items greater to focus on? If you're going to open the door to investing in your company, how do you convince investors of your financial situation, and how do you explain your financial situation to your partners as well? Shareholders and the IRS also need it.
We hear a lot of terms like: budget, income list, cash flows, what does each term mean and what does each list use? What is the difference between each other?
What are the financial statements?
Financial statements are sets of the company's final financial statements, which are involved in determining the company's financial position, and the information changes according to its purpose and destination, which is concerned with the company's owners, partners, managers, investors, shareholders and some government agencies.
Top corporate financial statements:
Balance sheet list (financial position).
List of cash flows.
Who is responsible for creating financial statements?
The managers must understand what they are, how they arise, how they read and what their usefulness is, because even if the function of the accounts is to be requested and analyzed, it is the responsibility of the administration.
We will explain the details of each financial list and how it is developed.
Income StatementIncome List:
Identify the corporate income list:
Expenses are simply compared to revenue and net profit calculation.
Expenses such as: purchases, operational costs, etc. (detailed).
Sources of income such as sales, currencies, etc.
The income list is drawn up for a given period, whether it is a year or so, and may be more or less.
What does it contain?
- All company expenses during the specified period including: resource costs, operational costs, marketing,invoices, rent, taxes, commissions spent for sales representatives, transportation, storage, doom, etc.
- All of the company's revenues that come naturally such as sales, or T that came because of the sale of an asset from the company or the profits of the stock exchange or others.
- (Net profit = imports – expenses)
The remaining figure after deducting expenses from revenue is the net profit in the organization.
Also (net profit/total expenses × 100 is the percentage profit).
- Example: The company spent 500 thousand pounds (350 thousand resources and materials, 50 thousand salaries, 50 thousand expenses operating and bills and chandeliers) and income of 550 thousand) this means that the net profit of the company is 550,000 000 – 500,000 = 50,000, profit ratio is 50,000 / 550,000 × 100 = 9.09%.
- Help the Board of Directors and business owners assess the current situation to make decisions to increase profits.
- Help to better invest project resources.
- Give indicators of any larger exchange items to work to save expenses, any larger sources of income to focus on or limit to and eliminate weak income items.
- Determine the value of taxes due.
- Enable investors to know the results of their investments, to make a decision whether or not to continue investing in the same organization.
- Enable creditors to control the status of the institution and ensure their funds.
What is the corporate balance sheet?
The company's balance sheet contains at a given time to know all of the company's assets and obligations (liabilities) at a given moment in time (virtual silence moment)
What does it contain?
All company property is placed in its various forms (fixed assets such as: buildings, furniture, equipment, cars, current assets such as: money, debtors' receivables, bank account, inventory, intangible assets such as: brand value, concessions)
In the second column we place all liabilities (debts to the company, arrears to suppliers, taxes, loans, and all dues that the company must pay within a year, as well as equity: dues to the company to investors and shareholders, or funds pumped by the owner of the company) and in order to be correct the sum of the parties must be equal, the basic equation: assets = obligations + capital.
- Understand the company's current financial situation.
- Check the amount of cash in the budget because it is useful for development and expansion.
- Know the partners, investors and shareholders of the company's financial situation to check on their property.
- Know the company's efficiency in using its assets to make profits.
- Understand how much risk the company faces.
Cash flow statement list:
This list is a statement of cash movements received and issued to and from the organization within a specified period of time.
What does the list of corporate cash flows contain?
All cash transactions of the company are placed in a period and divided into:
Operating activities: Cash flows from operation, any change in cash due to the company's main operation such as debtors' accounts, inventory, depreciation, including sales, rent, salaries and commissions.
Financing activities: Cash received or paid by the organization, such as loans, repayments, dividend distribution and new investments.
Investment activities: Cash invested by the enterprise, such as buying assets or lending to another institution, and returning from these investments.
That is, we are considering the value of cash, and has it increased or decreased? And what's the reason?
Cash flow list interest:
- Companies are interested in the cash flow list because it is an important indicator of the company's performance, as the presence of cash gives an opportunity to invest and expand, and increased cash may be an indicator of weak operation because it is unable to invest these resources.
- Having enough cash is a security factor for the company so you don't have to borrow in case you need to buy an asset, for example, or even have to stop because there's not enough cash for the process.
Financial analysis tools:
There are methods and tools used by managers and investors when reading financial statements, the most important of which are:
A list for a given period is considered the basis and compared to a list for another period, so a database needs to be available for different periods of comparability, and the comparison is absolute: 2020 is better than 2021 in terms of net profit or percentage so we say: profit in 2020 is 2% higher than 2% in 2019.
Horizontal analysis is very important to see the company's financial direction and growth pattern, whether profits are growing rapidly or slowly or in a stable or downward change and so on, and this is a very important indicator for management or investors to make decisions based on these figures.
It is also called a joint-sized financial statement analysis, calculating how much each item represents the base number in the statement, for example, calculating the percentage of the value of the erds of total expenses to determine the profit margin, for example calculating the value of purchases on total expenses to see how much purchases are of the rest of the expenses and so on.
Measures the relationship between two or more financial elements in the financial statements we talked about: (income list, financial position list, cash flow list).
Types of financial ratios:
- Liquidity ratio: To find out the amount of cash in the company to use in debt repayment, investments and others.
- Debt ratio: To know the size of the company's debt, and to what extent it relies on loans to finance its operations.
- Efficiency ratio: Measure asset turnover, inventory or debit accounts to measure the company's ability to use its assets for profit.
- Some financial statements may make a good impression and when the audit shows the opposite, and may also show a bad impression and when the audit shows the opposite, a good analysis is needed to come up with the right result, for example: lack of cash in the cash flow list may be a good indicator suggesting a good investment of resources, and it may be a risk indicator if the company has many dues and needs to be criticized for the operation.
- Financial reports are the position of chief financial officer of the company, and the manager must know them so that they can request them when needed and can analyze them and make decisions on the basis of which this financial management is called.
- These lists can be extracted easier using customized accounting programs, whether online or online such as Zoho books, Xero, QuickBooks Online.
- We talked about the balance sheet, a term that differs from the term general budget, which means: an estimated plan for state revenues and expenditures next year.
- It's okay to have a loss to the income list at first, but it's normal to improve until the revenue is equal to the expense and called the break-even point, and then the profits exceed the expenses, which is the goal of the business.