Understanding Financial Statements
Balance Sheet Stock Photo & More Pictures of Bank Statement _ iStock 
In any business, accounting is a crucial aspect of the business’s success. When you get the advice of an accountant and implement proper accounting systems, it will lead you to the correct path. Recording all the transactions daily and balancing accounts monthly helps you to run the business smoothly. Then at the end of a financial period, preparations for financial statements are inevitable for a couple of reasons. It is because you need to determine your business’s profit or loss and calculate the tax liability. Therefore things are not done in the order, and you could face severe problems from all sides. At the end of a financial period, the financial accountant prepares the statements and communicates with the company’s owner.
Financial statements
When preparing to prepare financial statements, we must consider essential things in financial accounting, such as the following.
- Financial Position or the Balance Sheet
- The Profit & Loss Statement
- Cash Flow and budgeting.
The Balance Sheet shows the business’s assets, liabilities, and equities of a company. It is a ‘snapshot’ of the business’s economic resources on a specific date. That is why when you see one, it says something like The Statement Of Financial Position as at dd/mm/yy.
Unlike a Balance Sheet, it is a ‘snapshot’ of economic resources, the Profit and Loss Statement of income and expenditure. It is a summary of the flows of earned revenues and incurred expenses of a business for a period. That is why when you see one, it says something like Profit & Loss Statement for the year 200X.
Cash flow statement
The Statement of Cash Flows summarizes the ‘cash’ effects of the activities of a business for a period. These activities can be operating, investing, and financing. The keyword I would like to emphasize in the above definition is ‘cash.’ It only records activities that involve the transfer of cash. When your sales are reasonable, you might experience difficulties with money in hand to meet the operational expenses. The reason behind that may be lots of goods or services sold on credit. If you have checked the creditworthiness of your customers, there is no problem getting cash to improve your cash flow.
The importance of Budgets
How is the budget prepared?
Financial statements are usually prepared after the transactions have taken place. Budgets are prepared in advance for the expected deals to take home and in conjunction with the company’s economic strategy and goals—budgets built on realistic forecasts for the coming period. Allocations are not done by imaging the figures with wishful thinking. The business managers analyze the previous period’s financial statements and prepare the budget for the future. Then managers decide on concrete goals for the future depending on the comparisons with the actuals and revise the budget. Budgeting takes a fair amount of time for the manager. So why should they do it if that is not helpful?
Are there ways in which you could cut your costs?
Any entrepreneur has to control costs at the start of every business. No cost item should go unnoticed or unmonitored. Their existence must be justified. Every dollar counts. Every dollar that gets tied up in one thing is a dollar that could otherwise use somewhere else. https://tinyurl.com/y983z6no
Regular cost management is possible with the help of the budget, as it tells you about overspending in any area. If you still face problems, seeking advice from a professional will help you.
Summary
- Balance Sheet indicates what you own and how you acquired them (borrowed from others or contributed by you).
- Your Profit And Loss show you how much you spend each period and how much you earn.
- The Cash Flows statement summarizes the cash exchange in your operating, investing, and financing activities.
- The importance of Budgeting helps to keep the expenses and income of your business under control.
When starting a small business, attention should place on your Profit and Loss statement. That is your record of how much income is coming in and how much expenses are going out. Look at the revenue items to know which activity is bringing in money. Then look at the expense items to see which ones cost you the most in your business. Then check whether those expenses are essential. https://tinyurl.com/y8zs382g