Finance exist at all levels of life, be it childhood or adulthood.
Today i will be walking you through on how to read and understand your financial statement. This will help companies incorporated and unincorporated establishments.
Talking about the financial statements of any incorporated company globally, there are bodies who sets standard for these companies to follow. I will talking about the most recognized once.
International Financial Reporting Standards (IFRS)
International Accounting Standards (IAS)
The IFRS set the basic rules and principles for all registered organization to follow. This has made accounting more easier as when compared to some time passed. Now all principles and standard are the same globally.
The way accounting records are prepared here in Nigeria, that is how it's been presented in other parts of the world and this has made the course more attractive due to what you learn in your country in the field of accounting, is applicable in other countries. It simply means that you can leave your country to another country and you will still be inform.
Follow me closely as i teach you on how to read and understand your financials.
Every company has it own statement of Income and statement of financial position as at a particular reporting date.
I will say that an income statement is a theory of the business. My reasons been that, at the bottom of the statement, you will always see profits or loss. This profit is not cash because it can't be spend.
As the Director of the business, you might take a look at it and say that you are really doing well because you don't know how to read your financials. After you finish reading this, you will be enlightened on the current state of your business and knowing if you have made profit or loss.
Some of the items found in an income statement
• Revenue (sales)
• Inventory
• Purchase
• Cost of goods sold
• Gross Profit.
Administrative and marketing expenses:
• Advertisement
• commission
• Maintenance
• taxation
• repairs
Net Profit/Loss
The format you see above is a typical way in which an income statement is been prepared. Normally for you to get the net profit, you have to do the following:
| Revenue: | xxxxx |
|---|
| Closing Inventory | (xxx) |
|---|
| Purchase: | (xx) |
|---|
| Returns inward: | (xx) |
|---|
| Cost of goods sold. | (xxx) |
|---|
| Gross Profit. | xx |
|---|
| Admin and mkt exp. | (x) |
|---|
| Net profit | x |
|---|
As i earlier said, the net profit you see in the statement of income can not be spent because its not a real cash. The gross profit is not a true profit because expenses has not been removed. The real understanding is in the financial position of the company.
Here we have things and stuff. Here the company either own or owe the things and stuff. These may include:
Assets:
Furniture and fittings
Motor vehicle
Goodwill
Cash
Inventory etc.
These things can either be own or owed by the company and this will either be equity or liabilities to the company. In simple terms, those assets if it's own by the company, it's called equity while if it's owed, it's a liability to the company.
As a director, you should be mindful of too much of inventory, receivables and taxes. When you have too much of inventory at hand, it's not good and when you always give goods on credit without collecting cash, it can lead to bad debt and this may make you to go out of business in no distance time. When you are not paying your taxes, it's bad.
As the owner of the business, you should always compare the previous year expenses with that of the current year to know whether you are doing well in business. Now if you can do good maintenance, pay your income taxes, don't invest too much cash in inventory and making sure you do not give good on credit, as you try to reduce your receivables, you stand the chance of making your business grow and continue to stay in business.
These are the tips and idea many business owners don't have and that is why they are faced with cessation of business in the short run. But when you can read your financials and having full understanding, you stand a better chance to grow.
You can go through this post over and over again to gain full knowledge on how to understand your financials. Thank you.
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