The Basics of Financial Statements a Businessman Needs to Know
As an entrepreneur, you must know some basic information
about financial statements in order to understand a smart investment choice from an impulsive choice. You must familiarize yourself with balance sheets or spreadsheets, cash flow and income statements and a lot more. So to help you familiarize yourself with the basics of financial statements, here are some terminologies you need to know to get yourself started.
What is net income? I’m sure as a newbie you are not so familiar with this term except for the “income” word which for sure almost everyone knows. To simply define it, net income is equivalent to a company’s overall earning and profit. To make it even understandable, net income is derived from subtracting your total expenses in the business from your total income or revenue, the difference would then be your net income. You must also note that having an increase amount of net income is a good sign that your business in doing great.
Cash flow is referred to the flow of cash inside and outside the business. It basically refers to the flow of revenue and expenses in your company in a given period of time. It is said that your business cash inflow often results from these three activities; the financing activity, the operation activities in the business and your investments. On the other hand, the cash outflow is said to be a result of either an expense in the business or probably an investment.
I’m sure you’ve heard of this term before however some may not clearly understand what asset it. Asses are those that increase the value of a company or business. Asset has the capacity to generate your business cash flow and to simply describe it, this is a resource. This is considered to be with economic value that any person, a business, a company or a corporation owns or control that someday can be used for the benefit of the business.
ROI or Return on Investment
Return on investment simply means the monetary gain you receive from a certain investment. It is also the proceeds a person received from selling his or her investments. This is said to be one of the most popular metrics in business financial statements. Once your ROI or return on investment is poor, then chances are you might have problems with the business. The equation to calculate your return on investments is as follows:
Return on investment = (Investment Gain – Investment Cost) and divide it by Investment Cost.
Explore your Financial Statements
The financial terms mentioned above are just few of the many financial jargon you must need to know when venturing into a business. You might get a little frustrated understanding these terms however just have a little patience and once you’re familiar with everything then I’m sure creating your own financial statement would be a breeze.