6 Things to Know about Financial Statements
Financial statements are the documents that will help you understand the business you plan to work with or invest in. These can be intimidating to a novice in the business since they are both comprehensive and complicated. However, a reasonably savvy business person could tackle them.
The goal of going through these statements isn’t only about knowing how much money a business has and how much it owes. It’s about figuring out what a company can do and is it worth your time and funds.
The annual report
The company has a responsibility to produce an annual report about its finance for the tax purposes, and also if it’s publicly traded. When you want to purchase the shares of a publicly traded company you have the right to get the annual report for free and learn about the company you plan to buy.
Since these documents are mostly made for the company to be sold to shareholders they contain information that might be of greater interest to shareholders in particular. They can also include the statement made by a SEO which gives you a sense of a tone and ambiance of the company from within.
10K and financial statements
It’s another mandatory set of documents that a company needs to make on an annual basis. It’s a report that’s sent to Securities and Exchange Commission. The most important part of it is the proof of the income that the company has made in that year.
These statements will also break down the debt the company has. It’s not only about knowing the amount itself, all though that is important, but also about going into details and dividing these debts into: deferred taxes, short-term loans, or overhead costs.
A financial ratio
Financial ratios are the relationships between two different data points about the business. It’s a way to learn about the business not only in terms of how well it’s doing overall, but also in terms of where it’s going well and where it can be improved and how. There are a few ratios to pay attention to.
These include: price to cash flow ratio as well as price to earnings ratio. These will help you set up your prices better and know how stable your business is financially. The asset turnover ratio is also something you’ll have to be aware of.
Income statements
One of the first skills to learn if you plan to invest in companies or acquire them as a business owner is to read income statements. This could also be done by a professional accountant, but it’s a basic skills and it will help you understand companies better, including your own.
It’s a simple document that’s sometimes also known as profit and loss statements. They present the money going and coming out of the company within a year or a shorter timeframe. It’s a useful tool since it can be combined with a balance sheet to let you know what kind of return you can get on your investment.
A balance sheet
A balance sheet is another rather simple tool that you could use to get a snapshot view of how the company is doing. That way you get see how a particular investment or a particular change in the way a business operates has affected your bottom line.
It shows simply what is owned and what is owed by a business. This is also known as assets and liabilities. What’s left when liabilities are subtracted from assets is known as a net worth of a business. This is the simplest way to present how a company is doing overall.
Revenue calculating methods
The companies are obligated by law to tell the truth in these documents. However, as is often the case it’s not always easy to know what the truth is and revenue can be calculated in a variety of different ways. Thus the revenue data may be true but still misleading in terms of what you want to find out.
For instance, there’s often a tendency to calculate the payments that haven’t yet been made as a complete once the deal about them has been reached or the contract signed.
Conclusion
Financial statements are the documents that a business needs to produce to showcase how much they make and spend within a year or within a shorter time frame. It’s important to know these things since that’s a way to decide in which businesses you should invest and which businesses you should buy.
This is work that can be done by accountants and financial experts, but it’s useful for the owners themselves to be able to dive into the details of how the company works and what it is that makes it profitable.
