Today, the craze for running startups and freelancing are taking over any other interest in the GenZ and that includes social media as well. Nowadays the generation is more interested in becoming independent and to achieve this they are into learning skills which can help them grow exponentially.
- What are Financial Statements?
- The Balance Sheet: What You Own vs. What You Owe
- Profit & Loss Statement: The Story of Earnings and Expenses
- Cash Flow Statement: The Real Money Tracker
- Financial Ratios: The Health Checkup of a Business
- Liquidity Ratios — Short Term Financial Position
- Solvency Ratios — Long Term Financial Stability
- Profitability Ratio — Efficiency of Earning Profits
- What does it mean for you?
One of such skills — a must have knowledge if you are aiming to become an entrepreneur lies in knowing the right financial terms. Finance is not the backbone — it’s the blood that runs through all the departments of an organisation. Let’s break down complex financial terms in easy language through our latest article.
What are Financial Statements?
Today, almost everybody holds a bank account and there is a summary of transactions which includes money coming into your bank account and money moving out, linked to every account. Similarly, they are also made for an organisation, called Financial Statements. It acts like a report card for a business. They tell us how well the company is performing financially. Let’s unveil its components.
| Balance Sheet | It is a snapshot of what a company owns (assets) and owes (liabilities) at a specified date. |
| Profit and Loss Statement | Also known as Income Statement that shows the money earned (revenue) and money spent (expenses) over a period of time. |
| Cash Flow Statement | This statement explains how money is moving in and out (cash inflows and outflows) of the business. |
The following sections shall disclose these terms with a bit more details.
The Balance Sheet: What You Own vs. What You Owe
The balance sheet of a company is built on a simple formula: Assets = Equity + Liabilities. Every organisation runs on funds which are either in the form of money or holdings (property, inventory). A balance sheet shows how the value of assets are balanced in the form of equity and liabilities. Let’s break down these terms.
Assets: It is what you own (cash, buildings, machinery, inventory, etc.)
Liabilities: It is what you owe (loans and borrowings, outstanding salaries, etc.)
Equity: It is the owner’s share. The money left after paying off liabilities is distributed to the shareholders.
For example- Your house, car and savings are assets. Your home loan, credit card bills are liabilities. What’s remaining after paying debts is your equity.
Profit & Loss Statement: The Story of Earnings and Expenses
A statement of any organisation is incomplete without evaluating its profit and loss. It is commonly called a P&L statement or Income Statement. This statement shows income and expenses of the business.
Net Profit= Expenses – Revenue
Revenue: Total sales (income) earned from the business activities.
Expenses: It comprises business expenses like salaries, rent, electricity, etc.
Net Profit: It is calculated as Revenue – Expenses
For example- Your monthly salary is your income (revenue), rent, groceries and other bills are expenses. The balance is your savings (profit).
Cash Flow Statement: The Real Money Tracker
It is correctly phrased “Cash is King”. A company can earn huge profits if it adequately manages the outflows and inflows of cash.
- Operating Cash Flows: Cash inflow/ outflow from day to day business operations (selling products/ services).
- Investing Cash Flows: Cash spent on buying assets (building, machines) or earned by selling them.
- Financing Cash Flows: Cash from borrowings, repaying loans, or paying dividends.
- Quick tip: Positive operating cash flow is a green flag. If a company consistently burns cash, it is a red alert.
Financial Ratios: The Health Checkup of a Business
Other than the components of a financial statement there are certain terms which are also linked to it as well. Let’s understand the few crucial ratios that provide the financial health status of a business.
Liquidity Ratios — Short Term Financial Position
| Ratio | Formula | Role |
| Current Ratio | Current Assets / Current Liabilities | Symbolises the strength of an organisation in paying its short term dues. A ratio > 1 is considered safe. |
| Quick Ratio | (Current Assets – Inventory) / Current Liabilities | Indicates immediate liquidity, excludes inventory which may not be easily realisable into cash. |
Solvency Ratios — Long Term Financial Stability
| Ratio | Formula | Role |
| Debt- Equity Ratio | Total Debt / Shareholders’ Equity | It shows the proportion of debt and equity financed in the business. Higher the ratio, higher the risk |
| Interest Coverage Ratio | EBIT (Earnings before interest and taxes) / Interest Expense | It reveals the capacity to pay interest expense from operating profits. |
Profitability Ratio — Efficiency of Earning Profits
| Ratio | Formula | Role |
| Gross Profit Ratio | Gross Profit / Net Sales * 100 | Indicates efficiency in production. |
| Net Profit Ratio | Net Profit / Net Sales * 100 | Reflects overall profitability after all expenses. |
What does it mean for you?
Understanding the financial statements often feels like cracking a secret code but they are just stories written in numbers form. The various users of financial statements includes:
- Investors- To judge and analyse if a company is worth investing (more returns, less risk).
- Employees- To know whether they are working in a financially stable company.
- Entrepreneurs- To have a reality check on their businesses for future growth prospects.
- Individuals- To apply the principles in effectively managing their personal finances.
