Understanding Financial Statements

Understanding Financial Statements

Understanding Financial Statements
In Financial Accounting - Reporting for those outside the business, the 3 most important financial statements, relevant for budding entrepreneurs are:
1 .​
The Statement of​ Financial Position or​ the Balance Sheet
2 .​
The Statement of​ Income or​ The Profit & Loss Statement
3 .​
The Statement Of Cash Flows .​
The Balance Sheet shows the business's assets, the liabilities, and the equities of​ a​ business .​
It is​ a​ 'snapshot' of​ the business economic resources at​ a​ certain date .​
That is​ why when you see one, it​ says something like, The Statement Of Financial Position as​ at​ dd/mm/yyyy .​
Unlike a​ Balance Sheet that is​ a​ 'snapshot' of​ economic resources, the Profit and Loss Statement is​ a​ summary of​ the flows of​ earned revenues and incurred expenses of​ a​ business for a​ period of​ time .​
That is​ why when you see one, it​ says something like: Profit & Loss Statement for the year 200X .​
The Statement of​ Cash Flows summarizes the 'cash' effects of​ the activities of​ a​ business for a​ period of​ time .​
These activities can be operating, investing and financing .​
The keyword that I​ would like to​ emphasize in​ the above definition is​ the word 'cash' .​
It only records activities that involved the transfer of​ cash .​
I can summarize the above even further:
1 .​
Your Balance Sheet shows you what you own and how you acquired them (borrowed from others or​ contributed by you) .​
2 .​
Your Profit And Loss shows you how much you are expending each period and how much you are earning .​
3 .​
The statement of​ Cash Flows summarizes the exchange of​ cash in​ your operating, investing and financing activities .​
I personally feel that for most freelancers, when starting a​ small business, attention should be placed on your Profit and Loss statement because that is​ your record of​ how much income is​ coming in​ and how much expenses is​ going out .​
Take a​ look at​ the revenue items there to​ know which activity is​ bringing in​ money and take a​ look at​ the expense items to​ see which ones are costing you the most and ask yourself whether those expenses are really necessary .​
Are there ways in​ which you could cut your costs?
Costs are what any entrepreneur has to​ control at​ the start of​ every business .​
No cost item should go by 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 be used somewhere else .​
This article was written for OrangesAndLime.com, to​ help creative individuals — artists, musicians, designers, illustrators and entertainers — build their own freelance businesses .​
Please note that this article serves as​ a​ guideline only .​
You should still seek professional advice regarding the matter because laws and practices change over time and they differ from country to​ country.

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