The 4 basic Financial Statements for Success
Finance for Non-Financial Managers
Unpredictability of the markets and the impact of changing consumer demands can lead to serious implications for business stability. Awareness in profitability is paramount. It is imperative that a manager has the ability to understand financial processes.
This article will explore the FOUR basic financial statements that Managers need to be comfortable with:
1. Balance Sheet
The balance sheet provides a snapshot for a particular date. It does this by showing what your business owns versus what it owes.
It displays your business’s status in the form of its assets (what you own), liabilities (payments you still owe) and the equity (the amount your shareholders own).
If your business is healthy, the assets will be equal to (balance with) the liabilities and equity.
One important number we look at on the balance sheet is liquidity. In order to evaluate this, you want to look at the current ratio. This is a measure of working capital.
It compares the current assets, which are assets that can be turned into cash in the next year, with current liabilities, which are obligations that have to be paid in the next year. A ratio of at least 2:1 of liquidity against debt is ideal.
2. Income Statement
The income statement or profit & loss presents a summary of the revenues, gains, expenses, losses, and net income or net loss of an entity for a specific period. This statement is similar to a moving picture of the entity’s operations during this period of time.
The profit and loss account does exactly what it says: it shows whether your business has made a profit or a loss over a given period of time. It does this by showing your total income and your total expenses, and whether your business has earned more income than it has spent on its running costs.
If it does, then you’ve made a profit. A profit and loss account will include your credits (including turnover and other income) and deduct your debits (including allowances, cost of sales and overheads) to find your bottom-line figure – either your net profit or your net loss.
3. Cash Flow Statement
The cash flow statement illustrates a company’s short-term viability and is useful for calculating your ability to cover payroll and other expenses like bills. This financial report shows the cash generated (cash inflow) and used (cash outflow) over a specified period of time.
Cash flow is split into the following activities:
- operating
- investing
- financing
The cash flow statement is therefore very useful for potential investors, lenders and creditors as it gives a clear view of a business’s short-term health.
4. Statement of changes in owners’ equity or stockholders’ equity
A statement of changes in owners’ equity or stockholders’ equity, reconciles the beginning of the period with an ending balance.
If non-financial Managers are to move upwards in their organisation, and in their career, a strong financial acumen is critical. Finance Skills can greatly improve your productivity, efficiency and performance, for as they say ‘knowledge is power’.
