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Financial Management
A basic guide to creating and analyzing financial statements
By: Husain AlQaseer
February 1, 2014
What should you know about
financial statements?
There are two basic concepts you need to focus on with regards
to financial statements:
How to create your financial statements: Creating your financial
statements helps you record your company’s performance over
time.
How to analyze your financial statements: Analyzing your financial
statements helps you better understand your company’s dynamics,
how to improve it, and how to compare it to other similar businesses
Creating your financial statements
There are three basic statements in a set of financial statements:
Income (profit and loss) statement – shows your revenues and
expenses over a period of time
Balance sheet – shows a snapshot of the business as at a specific
point in time
Cash flow statement – shows the movement of cash over a period of
time
Income statement
An income statement, also known as a profit and loss statement,
has two basic sections:
Revenues: Consist of all the income you make from you main
operations during a period of time
Expenses: All expenses contributing to creating your revenues during
a period of time
Profits = Revenues – Expenses
Income statement
Balance sheet
A balance sheet presents a snapshot of the business at a specific point in
time
There are three main parts in a balance sheet
Assets: Consist of all assets owned by the business. This will include items such as
cash and fixed assets (cars, machines, etc).
Liabilities: All liabilities or debts owed by the business. This will include items such as
bank loans
Shareholders’ Equity: This is what the shareholders own in the business.
The basic balance sheet formula is: Assets = Liabilities + Shareholders’ Equity
Balance sheet
Cash flow statement
A cash flow statement shows the flow of cash through a business
during a period of time
There are three main area of cash movement:
Cash flow from operations: This shows the movement of cash
from/to the main operations of a business
Cash flow from investing: This shows the movement of cash from/to
investments
Cash flow from financing: This shows the movement of cash from/to
the capital of the business
Cash flow statement
Analyzing your financial statements
One of the most important aspects of financial management is
using your financial statements to better understand your
business
Below are some examples of useful analysis equations:
Net profit margin: This shows you the percentage of your revenues
that turn into profits
Debt to assets: This shows you what percentage of your assets is
financed by debt
Let’s have a look at the financial statements to better
understand how you can analyze your business
Income statement
Balance sheet
Cash flow statement
Questions?