adminUnless you’re a finance guy, you might question yourself about financial statements. What is a financial statement? A financial statement is a record or report that illustrates the company’s finances and current financial health. It provides a summary of how the entity is performing financially over a specific period of time.
“So far, you will come across 3 types of financial statements: Balance Sheet, Income Statement (Profit and Loss Statement) & Cash Flow Statement
Balance Sheet
This type of statement is responsible for illustrating the financial position of an entity at a specific time and includes information regarding entity’s assets, liabilities, and equity.
Income Statement (Profit and Loss Statement)
This type of financial statement sheds light on an entity’s financial performance over a specific period of time and provides confidential information about revenues, expenses, and profits or losses.
Why Understanding Financial Statements Matters?
For the latter, a financial statement provides essential insights into the company’s financial health, enabling them to make informed decisions, contribute to strategic planning, and better understand the impact of their actions on the business’s overall performance.
The following essential ratios are frequently utilized in the process of analyzing financial performance:
- Profitability ratios: Profitability ratios are such ratios that help in determining how profitable a business is in terms of profit margin, return on investment, etc.
- Liquidity ratios: These ratios determine whether a business can pay its short-term bills (using ratios like the current ratio and the quick ratio).
- Solvency ratios: To help identify whether or not a company can withstand their long term debts, solvency ratios are greatly used.
- Efficiency ratios: An efficiency ratio is the ratio that determines how effectively a company uses its assets.
Tips for Understanding Financial Statements
Below we have enlisted a few tips that will help non-financial managers like you in understanding financial statements:
- Begin with the basics: Before jumping into complex topics, try understanding simpler concepts that are easier to understand.
- Seek assistance: Dont hesitate in seeking for help. Always ask for answers from keen finance experts.
- Visuals: Visuals and infographics like graphs and charts can help you draw a better picture about financial statements.
- Financial software: There are a number of financial tools and software available which not only simplify the process of acquiring financial statements but also enhance accuracy, provide real-time insights, and streamline overall financial management.
Be it financial managers or non-financial managers, understanding the basics about financial statements is necessary for all. The financial health and performance of a firm can be better assessed by managers who have a good grasp of the fundamentals of income statements, balance sheets, and cash flow statements.
If you too, would like to understand more about financial statements, or want experts to handle your firm’s finances, then TallyWise is your go to solution for professional and reliable financial management