Docy Child

Three viewpoints on a company’s financial performance are provided by the balance sheet, income statement, and cash flow statement.

Estimated reading: 4 minutes 21730 views

What assets does your business own and what debts does it have to others? What are its revenue sources and how has it used its funds? How much money did it make? How is the company's financial situation? The balance sheet, the income statement, and the cash flow statement are the only three financial statements that may be used to provide an answer to these questions.

Balance Sheet

An organization's assets, liabilities, and book value, also known as owners' equity or shareholders' equity, are all listed on the balance sheet.All of a company's available physical resources that it can use to further its business are referred to as assets. A liability is a debt owed to a supplier or another creditor.

Assets = Liabilities + Owners’ Equity or Assets - Liabilities = Owners’ Equity

On one side of the ledger, the balance sheet displays assets, and on the other, liabilities and owners' equity. Because the two sides must always balance, it is known as a balance sheet.

Marketable securities, cash on hand, receivables, and inventories are examples of assets. Liabilities are sums of money that must normally be paid off within a year and are owed to creditors and others.

How you relate to the balance sheet.

Accountants make balance sheets, and the information they contain is important for managers who don't work in finance.

Financial leverage

Financial leverage is the use of borrowed money to buy an asset. People say that a company is highly leveraged when it has a lot of debt on its balance sheet compared to the amount of money its owners have put into it. Operating leverage, on the other hand, is a measure of how much a company's operating costs are fixed instead of changing.

If the value of an asset goes down or if it doesn't bring in as much money as expected, the leverage works against the owner of the asset.

Working Capital

When you subtract the company's current liabilities from its current assets, you get its net working capital, or the amount of money it needs to run its current business.

A company can be in a bad position if it doesn't have enough working capital: It might not be able to pay its bills or take advantage of money-making chances.

Income Statement

The income statement/profit and loss report shows how well a business did over a certain amount of time, like a quarter or a year. It tells you if the company is making money or losing money, or if it has a positive or negative net income, and how much.

A simple equation can be used to show what the income statement is:

Net Income= Revenues – Expenses

Why should you care about the income statement?

Generating in money

If sales at the same store or for the same product go up faster than those of the competition, it's likely that the people in charge of sales and marketing are doing a good job. It's important for managers in these departments to know how to read an income statement so they can figure out how to balance costs and income. If, for example, sales reps offer too many discounts, they could cut into the company's gross profit.

If marketers spend too much money trying to get new customers, it will cut into their operating profit.

Cashflow Statement

The cash flow statement is the one that is used the least and is the hardest to understand. It shows in broad categories how a business made and spent money over a certain time period. As you might expect, expenses show up on the statement as negative numbers, while income sources show up as positive numbers. In each category, the bottom line is just the net amount of money coming in and going out. This number can be positive or negative.

Have you heard? How much money did a business make? What is its financial health like? You can find the answers to these questions by looking at the balance sheet, the income statement, and the cash flow statement.