Financial Statements: Understanding the Numbers That Indicate Your Business's Health

In the current investment world, as numerous numbers and data flood in every second, investors must decide which information to trust. Therefore, reading financial reports, also known as Financial Statements, is an essential skill. Financial statements are numerical documents that depict the overall health of a business’s finances, including asset prices, liabilities, profit and loss, or cash flows in and out. These FACTS help you make more informed decisions rather than relying solely on rumors or graphical analyses.

What are Financial Statements and how important are they?

Financial Statements (Financial Statement) are summarized numerical accounts prepared by organizations or companies to display financial information. These documents are used to analyze and evaluate the financial position as well as operational efficiency over a specified period. Interested parties can learn about profits or losses, cash usage, assets and liabilities, and other financial data necessary for investment decisions, credit granting, or financial management.

Besides reporting to government agencies such as the Department of Business Development and the Revenue Department, financial statements are also vital tools for management to plan strategies, assess operational performance, and make future business decisions.

How many types are there? Components of financial statements you should know

Financial Statements consist of four key documents, each playing a different role:

1. Balance Sheet (Balance Sheet)

This document is like a snapshot of the company’s financial health at a specific date, e.g., December 31, 2022. It shows the total value of assets (Assets), liabilities (Liabilities), and shareholders’ equity (Equity). By comparing assets with liabilities, you can determine the company’s net worth, asset management efficiency, and debt repayment ability.

( 2. Income Statement )Income Statement### This document shows how much profit or loss the company generated over a specified period, usually annually, based on total revenue and related expenses, resulting in net profit or loss. Management can use this data to analyze and plan operational strategies. Additionally, Income Statement provides information for calculating taxes payable to the Revenue Department, helping business owners plan expense management and tax savings effectively.

( 3. Cash Flow Statement )Cash Flow Statement( This document displays the inflow and outflow of cash, indicating increases or decreases from activities such as normal operations, investments, borrowing, or loan repayments. Preparing a Cash Flow Statement helps business owners plan cash usage and understand liquidity, enabling smarter expenditure planning. It also shows changes in the company’s financial position focusing on cash and cash equivalents.

) 4. Statement of Changes in Equity ###Changes in Equity( and Comprehensive Income )Comprehensive Income### This statement records and shows the effects of various changes in equity, such as changes in share capital, retained earnings, accumulated losses, and dividend distributions. The Comprehensive Income statement indicates the financial impact on the company’s assets over a period, reflecting changes in market value.

Advantages and limitations of using financial statements

( Benefits

Assessing the company’s financial position: Understand the current financial status and identify necessary information to evaluate the organization’s health.

Aid in planning and decision-making: Strategically plan business activities and make reliable investment, expansion, or financial management decisions.

For securing funding: Use the data to borrow or seek other financing sources, presenting it to creditors and financial institutions.

Monitoring operational efficiency: Get an overview of how the business generates profit, how assets and liabilities are utilized.

Setting growth strategies: Identify opportunities and obstacles for business growth, helping to determine future expansion strategies.

) Limitations

Complexity: Financial statements can contain extensive and complex data, especially in large organizations with diverse activities, requiring good understanding of accounting and finance.

Data accuracy: Some information may be inaccurate due to recording errors or subsequent adjustments.

Numerical only: They may not fully capture the complexity and relationships within the business.

Legal changes impact: Updates in policies may cause data to be less comparable year-over-year.

How to review and interpret financial statements?

When reading a financial statement of a company, ask yourself:

• From the Balance Sheet: What is the total value of assets? What is the total value of liabilities? What is the net worth?

• From the Income Statement: How much profit or loss did the company make last year? How did net profit change compared to the previous year?

• From the Cash Flow Statement: How many million in cash came in? How much cash went out? What is the remaining cash balance?

• Financial ratios: What is the debt-to-asset ratio? What is the net profit margin? Is revenue growing or declining compared to last year?

• Warning signs: What financial risks could potentially impact the company?

Why do investors need to study financial statements?

Assessing financial health: Understand whether the company is financially strong and capable of paying debts.

Investment decision-making: Have sufficient basic information to decide whether to invest, analyzing financial reports to understand financial condition, growth factors, and risks.

Performance analysis: Comprehend profitability and resource management, such as unusual expenses or EBITDA (Earnings Before Interest Tax Depreciation and Amortization).

Risk management: Identify potential financial factors affecting future performance and plan risk mitigation.

Valuing shareholders: Understand the company’s profitability, growth, and factors related to dividend payments.

Where to find and verify financial statements?

Company websites: Publicly listed companies often publish financial data under “Investor Relations” or “Financials” sections.

Financial data platforms: Use websites like Investing.com, Bloomberg, Reuters, Yahoo Finance, Google Finance, which organize data into graphs and tables.

Analyst reports: Read reports from stock analysts who analyze and rate investments.

Financial institution databases: Financial agencies may provide additional data services.

Summary: The importance of studying financial statements

Studying and utilizing financial statement data for decision-making is essential, as it helps plan future activities and manage efficiently. If you lack an accounting team, you can seek assistance from accounting firms to record, prepare, and verify financial statements accurately, ensuring the data is useful and reliable.