by Thandekile Moloko
If you own a business, or are part of a business, the compliance process of documenting the finances of the business may be a bit tedious, especially if your main intent is to make money and create an empire in the process. However, there are jewels of wisdom in financial statements that can help you best run your business and help you make better business decisions. Thus, it is important to understand the basic techniques of interpreting financial statements.
Any business needs to prepare financial statements on an annual basis, known as the annual financial statements. These are especially important in order to assess the wealth and financial position of a business; these will also enable the business to do proper financial planning. Financial statements consist of the following:
Statement of financial position (balance sheet),
Statement of comprehensive income (income statement),
Cash flow statement, and
Statement of changes in equity.
These statements would typically be accompanied by the relevant notes.
When in preparing financial statements any business should ensure that the information within these statements is; understandable, reliable, relevant and comparable. This allows the users of your financial statements to easily be able to interpret the statements.
The statement of financial position plays a significant role in determining the financial position of a business, it typically consists of the businesses assets, liabilities and equity. This will allow you to evaluate whether the business in growing through asset acquisition or merely spending money on operational activities. The liabilities in the statement of financial position will allow you to see how well are you servicing your debt and whether your assets are outweighed by the liabilities in the business. This will assist you in mapping out a financial planning strategy for the business.
The statement of comprehensive income determines the financial position of the business over a period of time. This statement needs to provide information regarding the profitability of the business, by taking into account all the revenue the business has generated over a period of time less the all the expenses incurred by the business in the same period. The income statement is useful for determining return on investment, and the whether the business is reaching is targeted revenue requirements.
The changes in equity statement consists of all the equity within the business, this is inclusive of retained earnings, share capital and other distributable and non-distributable reserves. This statement measures the changes of equity within a business which can be changed by any of the above mentioned elements.
Lastly the statement of cash flows measures all cash movements in a business for the current and prior financial year. Elements included in the cash flow statement are; cash generated in operating activities, cash generated in financing activities, cash generated from investing activities. The cash flow statement shows the cash received and paid through the business. Users of financial statements consider this statement to determine how the inflows and outflows of cash are being managed by the business.
Thandekile Moloko is a Wealth Coach and Wealth Manager by profession. She went to the University of Johannesburg. She studied Bcom Finance and Honours in Financial planning. Her love for people and changing people’s lives lead her into the financial planning. Thandekile was requested to be part of the ASISA (Association for Savings and Investment South Africa) program to enhance financial planning as an industry. She encompasses tenacity for finance, especially wealth management and personal financial management. With insurmountable experience gained in the industry, she has blazed the market with her expertise within the financial planning industry. With the intent of reaching a larger audience, she decided to increase the scope of her work into Wealth Coaching. In her Wealth Coaching career, she has changed many people’s lives and she changed the landscape of wealth management to be inclusive of those that need it the most. She is an avid believer in changing lives one financial situation at a time. WEBSITE / LINKEDIN / TWITTER
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