If you are an entrepreneur, you need to understand financial statements. Here is an introduction to the most crucial reporting statements you need to be familiar with.
These are the three financial statements considered most crucial for novitiate entrepreneurs, based on the discipline of Financial Accounting - Reporting:
The Statement of Financial Position - in layman's terms, the Balance Sheet.
The Statement of Income, also known as the Profit & Loss Statement.
The Statement of Cash Flow.
The Balance Sheet is where you can view the assets, liabilities, debits and credits of a business, as well as their equities. It can be viewed in the same way as, "how was this business doing at (place date and year here)." So you would basically seeing something to the effect of e.g. The Statement Of Financial Position as at dd/mm/yyyy.
The Balance Sheet differs from the Profit and Loss Statement - the former is a slice of financial life and a financial health check of sorts for a certain time frame, while the latter is more of a listing of income and expenses during that time. That is why when you see one, it says something like: Profit & Loss Statement for the year 200X.
The Statement of Cash Flows summarizes the 'cash' effects of the activities of a business for a period of time. These include, but are not limited to operating, financing and investing expenses. We must repeat the word "cash", because this is the common denominator in such statements. These are purely cash-related activities and nothing else.
For your ease of reading:
Your Balance Sheet shows you what you own and how you acquired them (borrowed from others or contributed by you).
Your Profit And Loss shows you how much you are expending each period and how much you are earning.
The Statement of Cash Flow is a summarization of how operating, investment and financing activities contribute to the transfer of cash.
For most freelancers, when starting a small business, attention should be placed on your Profit and Loss statement because that is your record of how much income is coming in and how much expenses is going out. It is imperative to descry this particular statement so you can find out for yourself which activities are the most financially lucrative and which activities are the cause of the most financial tension - and once you have figured out the latter, you would then need to figure out one more thing for yourself and your business. That is, how to become more cost-efficient?
Every entrepreneur must make sure that their business endeavor has firm control over the costs involved in their business. No cost item should go by unnoticed or unmonitored. There must be a reason behind the rhyme. Every dollar counts. Every dime, nickel or penny that is not accounted for is a dime, nickel or penny that could redound to something more significant in the long run.
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