Whether you are a startup or you have been in business for a long time, you might find
understanding financial reports reasonably overwhelming. This is because your focus is on running
your business full-time rather than pondering over the details of financial reports. So, to overcome
this challenge, you hire an accountant who maintains and manages your books and prepares your
financial accounts. However, even if you have a specialist handling your accounts, there are certain
reports you must understand and review regularly to assess your business’s financial standing and
make informed strategic decisions.
What are Financial Reports?
Before we dive deeper into understanding each report, let’s first understand what a financial report
is. Financial Reports are records or summaries of your business’s financial data over a specific period.
Importance of Financial Reports
Here’s why financial matters are important for a business:
A. To monitor business’s performance
B. To evaluate actual results with the budget
C. To help management make Strategic decisions
D. To ensure transparency between owners and external stakeholders
E. To comply with financial laws, taxes, and other regulatory requirements
Different Types of Financial Reports
A. Balance Sheet
Also known as a Statement of Financial Position, it is one of the most important reports for
any business, as it shows the firm’s financial health at a given point of time. This includes
details of assets, liabilities, and equity of the business. It works on the below equation:
Assets = Liabilities + Equity
Following is a breakdown of various particulars in the balance sheet:
1. Assets
Buildings, Inventory, Machinery, Cash – every resource that a company owns is
known as an Asset. These can further be broken down into Current Assets (expected
to be utilised in the current accounting period, for example – cash, investory, etc.)
and Non-current Assets (which are for the long term, fo example – land, building,
goodwill, etc.)
2. Liabilities
Liabilities, on the other hand, represent anything that the company owes to other
individuals or entities. This includes interest payable, loans, taxes, etc. These are also
further categorised into Current (due within a year) and Non-current Liability (due in
a longer duration).
3. Equity
Equity is basically what is owed to the business owners, such as share capital and
retained earnings. This is calculated as below:
Equity = Liabilities – Assets
B. Income Statement
Sometimes also referred to as a Profit and Loss Statement, it contains information about a
company’s revenues, profit/loss, and expenses during the accounting period. Read below to
understand the breakdown of the statement into the following categories:
1. Revenue
This shows businesses’ earnings during a particular period.
2. COGS (Cost Of Goods Sold)
It is the cost incurred to produce the goods/units sold.
3. Gross Profit
It is calculated as total revenue less the cost of production (COGS).
4. Expenses
Expenses incurred by the company for running day to day operations during the
recorded period.
5. Operating Income
It is the total profit after deducting operating expenses such as rent, utilities,
marketing, etc.
6. EBITDA
It is basically earnings before interest, depreciation, taxes and amortization and
reflects a businesses’ operational efficiency.
7. Depreciation
It is the value by which the assets of a business have decreased over time.
8. Income Before Taxes
It is the income after deducting the costs but before excluding the applicable taxes.
9. Net Income
It is the net income a business has earned after considering all the costs/expenses
incurred.
10. Earnings Per Share (EPS)
It is calculated by dividing the income by the total number of outstanding shares.
C. Cash Flow Statement
Comprising cash inflows and outflows, this statement shows the cash movement in an
organisation. This gives owners, stakeholders, and investors an insight into how a company
spends its money. The cash flow statement is further categorised as below:
1. Operating Activities
All the principal revenue-producing activities of a business including the cash flows
related to sales, purchases, and other expenses.
2. Investing Activities
It is the cash flow generated from the sale or purchase of assets using cash, including
land, vehicle, plant, equipment, and non-physical assets like patents and licenses.
3. Financing Activities
Cash flow resulting from changes in the business’s capital structure arising out of
borrowing and repayment of bank loans/bonds, dividend payment, issuing/buying
back of shares, etc.
Every financial statement, be it a Balance Sheet, Income Statement, or a Cash Flow, has its own
specific purpose in evaluating a company’s financial performance. So, whether you are a business
owner, investor, or a CFO, you must understand what these reports are and how to interpret them.
