Most entrepreneurs don’t like the seemingly complexity of finance and accounting matters except those with a financial background. With this strong abhorrence for all things finance and accounting they leave all the finance work to the professionals or just try to do the barest minimum. This approach hasn’t served most entrepreneurs well. It is important for entrepreneurs to concern themselves with the finance and accounting related aspects of the business. The truth is that finance and accounting is less complicated that most entrepreneurs realize. All it requires a commitment and dedication to understanding the basic finance and accounting principles.
In light of this, here are 3 financial statements every entrepreneur must understand:
The income statement is also known as a profit and loss account/statement, statement of financial performance, earnings statement, statement of operations or statement of revenue and expenses. The income statement gives a report of the business’ financial performance over a specific accounting period. It shows a summary of the business revenues against its expenses and arrives at a net income or loss. It is generally used to analyze the profitability of the business.
This statement is important as financial statements go. Cashflow statements reports the cash generated and used during a period of time. It tracks the flow and movement of money in and out of the business. It provides an understanding of where money is coming from and how it is being spent. As an analytical tool, the cashflow statement is useful in determining the business’ ability to pay its short-term bills.
Statement of financial position
Otherwise known as Balance Sheet. This financial statement shows the financial position of your business by summarizing the business’ assets, liabilities and shareholders’ equity (Capital) at a point in time in the business financial year. These three categories reveals what the business owes, owns and amount invested in the business. The balance sheet gives a snap shot of the business financial position at a point in time
These three financial statements each reveal an aspect of the financial health of the business. Learning how to read and interpret the information these financial statements present must be an objective for every serious entrepreneur.
This article is part of a series of conversations around helping entrepreneurs in Nigeria become financially intelligent. This subject will be discussed more extensively at the June 2017 Startit Academy, themed, Finance Fundamentals for Startups & SMEs. For more information about the event and registration, please click here.