How to Learn to Read Financial Statements
Learning the basics of reading a financial statement is crucial for anyone this is so that there is an understanding of how a company is performing.
A classic situation: reporting fixes profits, but there is no money in the safe and on settlement accounts.
Only high-quality, reliable, and timely financial reports help to understand the real state of affairs. Any of
your financial problems can be solved by Payday Depot. Go there and don’t worry about your finances.
So, why do even employees of non-financial departments need to understand financial statements, what
basic concepts to start learning from, and how do reports help (or hinder) managing a company?
Treat financial statements as the starting point for decisions
Financial reporting allows you to make the right decisions about business development. However, in many companies, even large ones, it is carried out chaotically or for the show: there is no system, uniform forms, and procedures, and employees do not know how to correctly record and interpret information.
For example, companies often do not have a mechanism for closing a period: an accountant can generate a report and then receive new data and add it after the fact. This distorts the real picture, and the business makes mistakes: a month ago, the reports showed profit — and the managers decided to increase development costs, but in fact, it was necessary to save money and bring the company out of losses.
Understand basic financial concepts
To learn how to read reports, you need to remember the basic terms. For example:
- Accounts receivable show how much money is owed to a company by its counterparties
- Accounts payable, on the contrary, reflect how much a company owes to its counterparties.
- Revenue is the money that the company receives as a result of its main activities (products sold, services provided).
- Income — all receipts of funds, including revenue, interest on deposits, fines collected, etc.
- Gross profit is income for a certain period minus cost.
- Net profit is the difference between the company’s income and all expenses (production and period expenses), as well as deducting income tax. In addition, net income is the difference between profit before tax and income tax.
Get Started with Three Basic Reports
There are three main financial reports — the business has not yet come up with anything simpler and
- A Balance Sheet (BS) records the financial condition of the company. It displays the assets (what the business owns), liabilities (what funds are received from), and the capital of the organisation.
- The profit and loss statement (Profit and Loss, P&L, IS) shows how much the company has earned over a certain period. Displays the net profit, type, volume, and channels of receipt of revenue, as well as the operating expenses of the business.
- The cash flow report (Cash Flow, CF) captures the movement of money and helps to monitor liquidity — to understand how much the company has spent and for what, how much money will be needed for different needs, and where (from which account) they can be taken.
Master financial reporting to the level required for your position
Ideally, employees of different levels and functions should understand the main financial reports: from the owner, CEO, and CFO to ordinary specialists in the financial department, accounting, sales, marketing, and HR. It helps to speak the same language and work towards common business goals.
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