A Financial statement is something that most business owners receive once a year but they don’t really read it because of it being too difficult to understand.
In this insert, I want to speak about Financial statements broken down into its basic form so that every business owner can understand the basic principles of it.
In the Retail sector, Financial statements consists mainly of three components.
A balance sheet shows what a business’s overall state of affairs is on a daily basis. Let’s suppose the business comes to a standstill, what does the business own and what debt does the business have? Those are the things you’ll find on the balance sheet. It basically consists of two categories:
Assets is what the business owns.
In other words, what does the business have today that can potentially help bring in money in the future or that can be sold at a profit? Examples of this include, property, vehicles, equipment, clients that owe money, the stock that needs to be sold and all money the business has.
Liabilities is all the debt the business still needs to pay.
This includes: Creditors, overdraft, loans and all other obligations the business is responsible for.
When the Company’s liabilities are more than the assets, it means that the business has more debt than worth. When the Company’s assets are more than the liabilities its valued a good business with worth.
An income statement shows the businesses income and expenses for a specific time period. A few of the most important terms include:
Turnover: A business’s total sales or in other words, the total of all your invoices sent out to your clients.
Expenses: Any costs the business has to keep going. This is mainly divided into two categories:
Cost of sales, this is any costs that is a direct cost of the product that you’re selling. Then there are overhead expenses and these are any other expenses the business is responsible for, like rent and salaries.
Gross Profit: Is your turnover minus your direct costs.
Net Profit: Is your total turnover minus all your expenses.
If the business’s profit is good, the business is performing well.
A Cash flow statement indicates how the business’s cash was used in a specific period. Business owners rarely understand how their business is making a profit of R1 Million but the bank doesn’t include the cash, that’s where this statement is of importance. The cash flow statement will show you how your profit is spent and where the cash is at.
The next time you receive your financial statements, look at it and see if you can figure out the terms and numbers. The principles aren’t difficult and if you understand the basic terms, everything will start making sense. You’ll be able to manage your business better and you’ll be able to make the right choices.
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