Starting a business is not easy. There are so many things to worry about like hiring, business strategy and the most scary of them all – finances! The finance department is the backbone of the company and is the greatest indicator of all to show you if you are making money or not. Those numbers reported by your finance team should be the main results you look at at the end of every month to see if you’re making money or losing money.
Now, if this is your first company or if you are not the ones usually handling the finance in the company, we will first showcase the 3 main components of a financial report. This way, you will gain insight as to how the report should look like and from there, you can begin to understand how to read it and extract the most important information from it.
Component 1 : The Balance Sheet
The balance sheet is basically a statement of the assets, liabilities and the capital of your organisation or business at that particular time. This balance sheet allows you to have a birds eye view on all the most important things in the company.
In the balance sheet you also have 3 more sections. These sections are :
A) Your Assets
Assets are known to be tangible or intangible and it is controlled and used by the company knowing that it would have a future benefit. Assets are things like property, company cars or it could also be the furniture in your office. It could also be shares or investments made by the company as well. The are basically resources that are beneficial to the financial health of the business.
Fixed assets can also include things like buildings and equipment. Patents, trademarks and copyright materials are the intangible assets your company might have. Despite not being physical, they still cost a lot of money and will bring benefit to the company in the long run.
B) The Liabilities
So this is sometimes known as the opposite of assets as they are basically the debts or legal obligations that the business might have. Usually these debts and liabilities will arise from the course of the business, so do not worry as they are usually collected over a period of time. It will not be an immediate slap in the face of liabilities once you set up shop.
Liabilities will also include simpler things likes wages, rent, vendor payments or mortgages for property. Some liabilities like salaries and wages are more short term but there are also some liabilities that are much more long term like mortgages or equity shares.
C) Owner’s Equity
This is the remainder of the company’s assets or shares or equity once all the liabilities have been minused off. This is basically a sum of money that can be divided amongst the shareholders. The best ways to increase this equity is to either gain more profits in the long run or increase the number of investors in your company!
Component 2 : The Profit and Loss Statement
This statement is one that many people fear. The only reason being is that this is the sheet that will make or break every director meeting. It is a very clear and transparent statement that will show you how the company is doing in its truest sense.
A profit and loss statement is usually created over time. So do not expect one made for you every week. It is usually done quarterly or every half-yearly. The main components in the profit and loss statement are :
Expenses are very important to be put up first so that you know exactly what you’re spending on and where the money is going. This is the outflow of cash or assets that run your day-to-day business. This is where the typical expenses of the company lies like wages, salaries, rent, utilities and perhaps maintenance fees.
This is where the green comes in. This is basically the amount of cash that your company receives during a specific time through the sale of your goods or services. Basically, this is the money you receive for the output of your business.
When your company suffers a loss, this loss means that it is the decrease in your equity due to multiple different types of activities or transactions.
Component 3 : The Cash Flow Statement
Example of A Cash Flow Statement
Picture Credits : http://www.fawnmag.com/13853dbzwef/WaZNQz13855/
Like the picture above states, a cash flow statement is basically a summary of the actual or projected inflows and outflows of cash in your company over a period of time. The cash flow statement usually shows off the liquidity of the company’s assets. This is what you should use for budgeting and business-planning.
At the end of the day, there are so many moving parts not just in a company as a whole but also in a department like the finance department. Understanding all the technicalities of a department as huge as the finance one is not an easy feat.
Especially in Malaysia when now we have a new business reporting system called the Malaysian Business Reporting System which will be the new way all businesses will have to report their finances at the end of the year.
This will soon be compulsory for every business but do not worry as SSM has allowed for workshops to be run so that your team can get up to speed with this new system.
To register for the workshop with the people who actually developed this system alongside the Malaysian government, click this link to register today!