Being able to understand financial statements is one of the vital skills every investor, manager, and entrepreneur should possess. With this ability, investors can better identify opportunities, while managers and entrepreneurs can make more strategic decisions.
The financial statements provide a picture of the company’s health. Three of the major business accounting software reports are the statement of financial position, the income statement, and the statement of cash flows. Learning each financial report will help stakeholders clearly see the company’s financial condition and guide them to take appropriate actions.
Statement of Financial Position
At a glance, the statement of financial position or the balance sheet will show all company resources and how they were financed – whether through capital investment or liability. The balance sheet lists all the company’s assets, liabilities, and capital at the reporting date.
Moreover, the balance sheet provides more valuable insights when analyzed using ratios and metrics. For example, leverage ratios can help users assess the company’s ability to meet its financial obligations. The debt-to-equity ratio can reveal whether the company is relying too much on debts to operate. Working capital, computed by deducting current (short-term) liabilities from current assets, will show the operating liquidity of the business.
The income statement summarizes the cumulative effect of the accounting period’s revenue, gain, expense, and loss transactions. This report will prove whether the company was successful in deriving revenue and profit from its operations.
Managers can also use ratios to gain better insights into the business’s income performance. Business owners can compare the company ratios to the previous period’s ratios or against the industry and competitor ratios to track company standing.
The gross margin, derived by dividing the gross profit over net sales, represents the percentage of sales revenue available for reinvestment. The profit margin, computed by dividing the net income after tax by the net sales, is the most commonly used ratio to determine profitability.
Statement of Cash Flows
The statement of cash flows presents the movement of cash in the business. There are three main categories of cash flows in this report: operating, financing, and investing. This categorization allows users to observe the impact of each activity on cash utilization.
Primarily, users should check whether the net cash flow under each category is positive or negative. Positive cash flow means the entity was able to generate more inflows than outflows. While negative cash flow does not necessarily mean that the company is losing money, this should still be looked into to understand why it is spending more than it is making.
Automate the Generation of Financial Reports with Bookkeeping Software
Financial statements are more useful when they are accurate and timely. In today’s age, where businesses need to be prepared for any market and economic stimuli, entrepreneurs need to equip themselves with bookkeeper software to generate financial data quickly and correctly.
KIPPIN – from the phrase “Keeping it simple” – aims to make people’s lives easier by providing simple solutions to everyday tasks. KIPPIN delivers a comprehensive accounting tool aimed to streamline complicated and time-consuming tasks. It features an easy user interface, automation, and prompt reporting.