How to read Financial Statements

Published by Peet Pieterse

January 23, 2020

As a business owner it is important to understand how to read annual financial statements. This will give you as the business owner insight on how healthy your business is and helps you to plan for the future of your business. 

There are two main components any business owner needs to understand and read. These reports are the balance sheet or statement of financial position and the Income statement or Profit and Loss.

The balance sheet

The balance sheet of a company is a snapshot of what the company owns and what the company owes. The balance is the equity available in the company. These are the main categories a balance sheet consists of. To break it down further, your assets and liabilities are broken down into current and non-current assets and Liabilities. Non-current assets and liabilities are long term investments or loans that will not realised or paid back within the accounting financial year. Current assets and liabilities on the other hand are assets or liabilities that will realise within the accounting year.

When analysing the balance sheet, it will be handy to learn some of the most common ratios that will provide more insight into your business. I will cover this in a later article. When discussing your annual financial statements with your accountant it is important to ask as many questions as you can, your accountant will help you understand when the figures mean.

Profit and loss

This is a statement that breaks down what your company received (sales) and when it costs to run your company (expenses). What is left over is profit. Plain and simple as that. It is important to scrutinise your income statement with your accountant as this will provide valuable insight into what your hard earned income is spent on. It helps to compare your year on year income and expenses to make sure that your company has grown and that your expenses did not get out of hand. 

This is the basics you need to understand when you discuss your financial statement with your accountant. In a later article, we will discuss important ratios you can use to analyse your business.

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