Getting To Grips With Financial Statements

You may consider yourself the ideas guy or the inspirational leader, the woman who takes risks and makes big decisions or the man who goes with his gut instinct to pull in the best business. These are all highly desirable qualities but they are also difficult to adequately define or quantify and the corporate world is all about being able to prove your worth and identify your skill sets.

This is why it is absolutely essential for any young professional to have a solid grasp of financial management. The bottom line is the bottom line and you can have as much creative flair as you like but if you cannot correctly analyse basic financial reports and statements then the profit that your endeavours generates can all too easily disappear.

A lot of employees run scared of financial statements, believing them to be the impenetrable reserve of the accounts department but you don't have to be a mathematical wizard to understand the fundamentals of financial accounts.

The three basic financial statements are the balance sheet, the income statement and the cash flow statement. These all interconnect to some extent but it is important to clearly understand what each statement means and what its fundamental purpose is.

The balance sheet is a record of what a company both owns and owes and is prepared at the end of a given accounting period to reflect the financial state of the business. The statement comprises the financial total of the business' assets, the sum of the business' obligations (liabilities) and the equity owing to the owners of the business. The equity is calculated by subtracting the liabilities from the assets.

Whilst a balance sheet examines the overall state of the business at a given time the Income statement provides a snapshot of how the business is doing at any point during the financial year. This statement compares how much incoming revenue the business has against its outgoing expenses. It is vital to regularly generate an income statement in order to keep track of movements as often it can feel like huge profits are being generated from orders received when in actual fact the figures are severely skewed by the company's outgoings.

The net income amount is arrived at when expenses are deducted from income and this figure in turn must be entered into the company's balance sheet within the equity column. However, there are other factors that can complicate this figure and that is where a Cash Flow statement is essential to utilise.

The net income account is not the same as the net cash amount as cash generated may subsequently be reinvested or there may be non-cash accruals to take into consideration. To get to grips with exactly how much cash your business has generated a Cash Flow Statement needs to be prepared that takes into account the beginning and end of the financial period examined on the balance sheet as well as the net income amount.

Getting to grips with financial accounts does take time and effort but is well within the reach of any competent professional. An introductory course will both reiterate the basics and go that little bit further to improve your confidence in financial matters.