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5 Minute Finance Lesson: Financial Statement Basics

The first thing or three things, rather, that you should teach yourself are the basic financial statements. The balance sheet income statement and statement of cash flows – these three statements are vitally important because they paint the financial picture of your company and help you to evaluate past performance and plan for the future.

So here are the basics to financial statements. In less than five minutes, you mm-hm, hmm. The first financial statement that you’ll need to know about is the balance sheet. The balance sheet shows a company’s assets, liabilities and shareholders. Equity has of a specific date. Its assets are split into current assets, which includes liquid assets such as cash and accounts, receivable and property plant and equipment which are left less liquid assets such as land buildings and obviously, equipment liabilities are also split into current liabilities and long-term liabilities.

Current liabilities are those due within the next year, while long-term liabilities are those due in over a year. So, for example, if you have a mortgage, the portion of the mortgage – that’s due within the next 12 months, would be counted under current liabilities, and the rest of that mortgage would be counted under long-term liabilities. The total assets and total liabilities plus shareholders equity must equal each other.

So if you create a balance sheet and these two numbers don’t match, you’ve made a mistake somewhere and need to go back and check your work. The second financial statement that you’ll need to learn is the income statement, also known as the profit and loss statement. The income statement shows a company’s profit or loss over a specified period of time, and it shows revenues and expenses split into operating and non-operating income operating income starts with sales and cost of goods sold to give the gross profit margin.

It then deducts operating expenses, split into selling expenses and general and administrative expenses tallying expenses – are those expenses directly related to sales and would include things like advertising and sales commissions for your salespeople? Administrative expenses include the cost of running the business that are not directly related to sales, such as office supplies and utilities. The gross profit minus your operating expenses gives you your operating income.

Then you add or subtract the non operating income such as interest to get your net income. The final financial statement that you’ll need to learn is the statement of cash flows. The statement of cash flows is vitally important, as many small businesses failed, not because of profitability issues, but because of cash flow issues. The statement of cash flow shows a company’s inflow and outflow of cash over over a specified period of time.

The cash flow statement is broken into cash flows from operating activities, cash flows from investing activities and cash flows from financing activities for cash flows from operating activities. You start with the net income and then you adjust for non-cash revenue and expenses such as depreciation accounts, receivable and accounts payable for cash flow from investing activities. You include things like the sale of a factory building or equipment and finally, for cash flow from financing activities.

You’Ll include things like the sales or purchases of stock or a distribution of dividends. This gives you your net increase in cash. Add that to the cash you had at the beginning of the period and you’ll know how much cash you have on hand available now. Now that you understand the basics of these three financial statements, you’ll better understand how your company is performing so that you can strategize for future growth.

I hope you found this tutorial helpful, subscribe to my youtube blog and follow me on Twitter to get more tips, tricks and tutorials to help. You run your business. You you


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