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Financial Report: This is What Professionals Do

The financial report allows business owners to get essential information about the condition and financial performance of a business.

Being a business owner is not an easy task. You have to monitor your financial activity regularly and seize every opportunity to invest. However, these two important tasks will require prying into a financial report.

Bookkeeping is a task a business owner often avoids. Which is why they hire a bookkeeper to spare themselves from the headache.  Even if you already have a bookkeeper to deal with your financial statement, it does not mean you are off the hook.  You are a business owner. You need to know how things are going with your business. This means you should know how to interpret a financial report.

So breathe, clear your mind and read...

Known What To Read

A financial report contains a plethora of information. Since it is the summary of the health of your business, you will be presented with information you wish or you do not wish to obtain.

Decide what to read.

For instance, if you want to know whether or not your business is making a profit, read the profit and loss section. Allow your bookkeeper to discuss the strengths and weaknesses of your business before you proceed with asking for some sound recommendations.

If you wish to get a copy of the financial report's simplified version, you can ask your bookkeeper to provide it. However, you have to keep in mind that this shortened report will not give investors and investment managers a clear idea of your business.

Gain Basic Understanding of your Financial Statements

The balance sheet, income statement, and statement of cash flows are considered the core of your financial report. You cannot make sense of your financial statements unless you have a rudimentary understanding of your financial statement. If you know nothing about your financial statements, interpreting them will be a daunting task.

Check Profit Performance

You will know your business generates profit if it is making sales. It should also keep expenses which are less than sales revenue. Reading the sales revenue is the best place to start in determining the profit performance of your business.

Do you know the gross margin ratio of your business?

If you were to compare the current sales revenue with the previous year's, have the figures increased or decreased?

Compare Cash Flow From Profit

Cash flow is an important component of your business. It should continuously flow to maintain liquidity. Your cash flow will be used as your source of capital to grow your business.

You do not just make profit as you also need to generate cash flow. Cash is obtained from selling off some assets, borrowing money or getting shareowners to put money in your company.

Heed Signs Of Financial Distress

You will need to know how the solvency of your business looks. Do you still manage to pay your bills on time?

Analysing solvency involves searching for signs of financial distress. Failing to identify these signs can have a serious impact on your business.

Look For Any Possibility Of Fraud

Fraudulent activities can affect your business. It may only be noticed if the company is already losing thousands or worse, millions. If you are presented with a revised statement, you need to ask an explanation from your accountant or bookkeeper. All too often, restatement is due to the fact that the original financial statements were based on fraudulent bookkeeping or accounting.

Financial reports can be somewhat conditional, but it is an important source of information so investors are  informed about executive changes, economic trends, business takeovers and much more.

Tamara Deterding

Written by : Tamara Deterding

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