Fundamental Understanding Financial Statements Is A Default For Founders & Innovators.

When you are running a business, there are some fundamental questions you have to keep asking yourself at certain frequencies. Some questions are required to be asked on daily basis, some on weekly basis, some on monthly basis, some every quarter, some every. year.

The frequency of questions is secondary to the essence, context, and depth of questions.

If you are in the business of selling goods, you may want to monitor how many units of those goods are you selling. What are the prices are you selling at. What are the costs associated with the goods you sell. What are other costs you are incurring in selling those units. What is your rent. What is your electricity bill. What is amount of salaries you are paying. After earning from sales and paying all the costs, what is money you are able to pay yourself as a salary.

The are some additional questions around how money flows through your bank. Is all the money that you earn from sales hitting your bank at right time. Are you receiving anything in bank as an investment. Have you paid back to any investor. Are you making investments for future growth.

Further, you need to ask questions around overall health of your business. How much of assets do you have. Do you have any liabilities that you need to pay. Do you have some unsold inventory lying around. What is the cash balance in the bank.

The list of questions is endless and you may need to prioritize the questions on the basis of their context, relevance, depth and impact of answers.

To be able to answer these questions, you have to arrange all the information on some type of structure that helps you monitor your business activities in the light of past, present, and future.

In business, the information related to business activities is arranged in 3 types of structures that may help you monitor your business with ease.

There are three primary types of statements you use

• Income Statement - Statement Of Income (s), Statement Of Earnings

• Cash Flow Statement - Statement Of Cash Flows

• Balance Sheet - Statement Of Balances Of Accounts

Types of Accounts

It is important to understand the concept of accounts and draw a distinction between accounts of a firm in a bank vs accounts of records.

When you are a salaried person, there is only one type of account you usually pay attention to - The Bank Account. Most of your earnings and expenses are handled from these 'bank accounts' because money moves directly in and out of your accounts. The transactions are mostly simple thus you may not need to maintain a separate record of classifications of each type of earning and expenses.

When you are running a business, the scale and complexity of transactions is huge. Thus you need to maintain the classifications of each of the numbers related to business and value of each of the relevant unit. In simplest form (as was done before computers and spreadsheets came into our lives) you would maintain a book to record all classifications of all types of revenues and expenses as well as records of transaction under classifications.

Thus a firm maintains a set records where each type of business activity is recorded under different 'accounts of records'. In fact, an actual bank account is also mapped to one of the 'accounts of records' and all the transactions that happen in an actual bank accounts are replicated in this 'account of records'.

After this detour let's get back to Statements Of Accounts which are also called as Financial Statements.

STATEMENT OF EARNINGS | Income Statement

Income statement is about incomes and expenses. Its more about how much of profits are your operations making. Its about monitoring whether your business is growing or shrinking. Its about understanding where the business you are incurring most costs.

Income statement helps you keep daily, monthly pulse checks of your business. if you are a business student, this is the statement you should study most to understand any business. If you are entrepreneur, this is the statement you will keep going back to to understand your business performance. In a way it is your business performance report with financial figures representing every activity of your business.

STATEMENT OF CASH FLOWS | Cash Flow Statements

Cash flow statements help you keep a check on the flow of actual cash in or out of your business ecosystem and classifications of those cash movements. Increase or decrease in cash available with you can me studied through this statement.

STATEMENT OF BALANCES | Balance Sheet

This is a key statement that helps you to understand the health of your business at any point in time. Its is about understanding the size of your assets and your liabilities. Its checks the vitals of your business just like a full body scan helps you understand the health level of your body.

We will be covering each of these statements especially the income statement in detail in a couple or articles. Our leadership team being a business operator emphasis spending a significant amount of time on income statement while keeping a close eye on the other two statements.

See you soon. Stay Connected.

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Team 10th Boulevard