The financial records are a business owner’s ally in making decisions related to the course of action. In her lesson, Digital Masterjee Professor Sanjay Kathuria continues with a burning problem that most of the entrepreneurs have, which is understanding financial statements and its value. These documents inform you if your business is growing and helps in devising future strategies.

Why Are Financial Statements Important?

Kathuria suggests that these statements serve as a health checkup for your business. Prof. Kathuria explains that these statements are used to create a dashboard for your business. It shows at a glance whether the business is blooming or heading in the wrong direction.

Entrepreneurs tend to make the mistake of focusing more on day to day workings of the company. While it is advisable to track collections and spending, it is important to move from micromanaging to monitoring the strategies of the business. This puts emphasis on growth and not on everyday tasks, which is how businesses get stuck.

Different Types Of Financial Statements That You Should Know

As Professor Kathuria pointed out, every business owner must know three core financial statements.

1. The Balance Sheet

The balance sheet exemplifies your business’s financial position only for a specific period of time. It gives you important details about:

• Business assets and liabilities
• Available cash reserves
• Current standing on inventories and raw materials
• Accounts receivables
• Suppliers’ credit
• Clients’ credit
• Resources and tools

Typically, a balance sheet is prepared “as of” a specific date. For example: “As on 31st March 2019.”

2. Profit and Loss Account

The account gives details of the business’s fiscal activities for the specific duration of time. It includes:

• Sales during the said time period
• Net profit earned viably during the time frame
• Expenses during the said time
• Taxations
• Net profit or loss

Such a statement is crucial for control in issues of costs and profit maximization.

3. Cash Flow Statement

A cash flow statement takes into consideraion the information from the balance sheet and the P&L. It aids in understanding the following:

• Quantify the amount of cash that can be assessed from the business.
• Cash that is earned during the operational activities of the business.
• The outflow of cash in a specific time duration.

This statement is crucial because it indicates whether a company has sufficient liquid resources to act upon its current liabilities, irrespective of whether any revenue is being recognized, and the cash is yet to be received.

Why These Statements Matter

These statements do not only present figures but also provide an insight into the performance status of the business. This is how these records assist you:

• The financial position of your business.
• Profit, loss, and margin.
• The management of cash.
• Positive or negative growth patterns.
• Comparison with industry benchmarks and competitors.
• This information is important for evaluating the effectiveness of your business in the competition and overall health of the business.

The Importance of Financial Statements in Strategy Formulation and Evaluation

Having an in-depth understanding of your financial statements enables you to, data driven decisions:Take robust steps towards meeting targets that are beyond reach Understand the repercussions of decisions made and actions undertaken with regards to your operations Measure Results Set strategic goals for growth Over the years Prof. Kathuria has proposed that financial statements can also be utilized as a basic decision making tool.

Comprehensive Action Plan

To becoming empowered with bold and audacious steps towards protecting the monetary reserve of your business invests in understanding your financial statements. With the course, you will learn how to effectively analyze financial statements and as a result get competent enough to make better business decisions.

In order to make certain, you and your company do not go off track when establishing business goals, you need to learn how to read and analyze the balance sheets, profit and loss accounts and cash flow statements.

Final Thoughts

Always remember that a company’s financial problems can easily be solved by analyzing the financial statements. Most of all the problems brought about by these statements affect operations are long term in nature.

Long term planning, monitoring day to day actions towards progress and strategic decision making are major objectives of these financial statements.

Combining foresight with analysis of quantitative factors will allow you to put your business at an advantage when making decisions that impact its success.