Cash Flow Duration And The Term Structure Of Equity Returns Basic Financial Statements You Should Get From Your Accountant

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Basic Financial Statements You Should Get From Your Accountant

How often do you receive a financial report from your accountant? Can you see the report only when it’s time to file your Annual Income Tax Return (ITR)? Do you sit down with your accountant to discuss the financial statements or just look at the bottom line and the amount of tax you have to pay?

At a minimum, you should ask your accountant to provide you with the following financial statements each month: BALANCE SHEETS, INCOME STATEMENTS, and CASH FLOW STATEMENTS.

You should receive these reports in a timely manner so that you can review and analyze your finances and determine if these are the actions you need to take to improve your business and finances. You should definitely set a deadline that your accountant will be obliged to follow.

Balance Sheet

The balance sheet shows the financial situation or the value of your company’s assets, liabilities and capital at a certain point in time. It’s like a balance sheet that shows your company’s liquidity and financial structure.

The balance sheet shows whether you have enough available funds to cover your obligations. Being liquid means that you have enough cash and other assets that can be easily converted into cash to meet your current and near future (less than one year) obligations. On the other hand, being solvent means that in the long term (more than one year) you will have enough funds to meet your financial obligations when they come due.

Your accounting system must be able to capture the correct balances of your assets (such as bank accounts, accounts receivable and inventory) and liabilities (such as accounts payable, wages and taxes) to provide an accurate picture at the end of the month.

The balance sheet also shows how your company’s assets were financed – how much was financed by investors (equity) and how much was financed by money borrowed from creditors (borrowed capital). This information is especially important when you want to borrow additional funds from a bank or other lending institution. They would like to know how much risk investors are taking compared to the risk taken by creditors.

Income Statement

The income statement reflects the performance of your business for a specific period. People usually associate the income statement only with the bottom line or net income, but you can learn more by analyzing the income statement.

  • You can see your sales trend and know if your salespeople are achieving their goals.
  • You can see your production efficiency by looking at your direct costs or cost of goods/services sold. What factors drive your costs? Are you spending too much on direct materials, direct labor, or overhead?
  • You can see if your gross profit margin (GPM) is competitive with other companies in your industry. If you have a lower GPM, you can review your selling price or direct costs to see where you can improve.
  • You can see how much you are spending on your sales and marketing initiatives and compare it to the sales revenue you are earning. If your sales and marketing costs increase and your sales revenue remains lower, you may want to start thinking about other strategies.
  • You can also see how much you spend on general and administrative costs. If you want to cut costs, the income statement will show you which areas of your business are eating up too much of your resources and may need to be cut back.

Cash flow statement

A big part of running a business is managing assets. You need to ensure that your company’s cash inflows are timely and sufficient to cover your cash outflows. Regular analysis of the cash flow statement will allow you to determine the working capital your business needs. You will also see if your activities are generating enough funds or if you need additional funds from your investors or creditors.

Accounting is a service function. You should get an accountant who can prepare you timely and accurate financial statements. You should be comfortable enough with your accountant to ask for insights that can help you improve your business.

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