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.
Marquez Comelab is the author of the book:
The Part-Time Currency Trader . It is a guide for men and women
interested in trading currencies in the forex market. Discusses analysis,
tools, indicators, trading systems, strategies, discipline and psychology.
See:
http://marquezcomelab.com. His other articles are also published at
http://thefreedomtochoose.com along with other helpful articles.
