How to Read Your Financial Statement

By March 6, 2018 March 3rd, 2020 No Comments

For many, a brand new startup is focused on creating an innovative product or service that will change the way we work or live. Startups often begin with low budgets or not budget at all , and every penny spent is monitored to ensure it contributes to the overall success of the business. That’s why smaller startups will often reject the idea of hiring a bookkeeper or an accountant, as creative and passionate leaders are often more focused on the product than the numbers. Financial statements are important documents that give an organization the opportunity to truly understand the financial status of their organization, allowing them to make important decisions about the future of their company. Here’s why organizations, and startups in particular, need to understand the importance of a financial statement and invest in accounting services.

What is a financial statement?

Financial statements are like report cards for your business. They give a comprehensive overview of how your business has been doing over a specific period of time, and allow you to see where you will be going in the upcoming business year. Financial statements are often packed into an organization’s annual report.

There are a number of different reports that fall under the term “financial statement”. Each of these reports allow an organization to assess their financial position, but each report displays different kinds of important information. A balance sheet allows an organization to see their assets, their liabilities, and their net worth. Taking a glimpse at a balance sheet allows an organization to budget appropriately for the upcoming fiscal year. For organizations looking to expand, it’s important to properly plan your expansion according to your balance sheet results. An income statement shows an organization’s revenue, expenses, and profits. This is a crucial report for businesses to refer to when creating strategic plans for their company. A cash flow statement merges both the balance sheet and income statement together and gives an overall view of an organization’s financial, investing, and operating activities.

Understanding each of these documents is crucial to running a successful company.


Why do startups need to understand their financial statements?

In the startup world, there’s often a ton of creativity at play. Founders are looking to address a gap in the market with an innovative new product or service, and young employees are looking to join an organization that can fuel their creative spirit. Investors are looking for a company that will not only diversify their portfolio, but is positioned for financial success to ensure they get a return on their investment. Startups looking for continued investments will need to have a grasp of their financial statements in order to attract new investors.

With money tight in the seed stage of a startup, it can be difficult to justify spending additional money on a financial services team like an accountant or bookkeeper. However, adding a professional financial services team or employee can only benefit your business, allowing you to understand your financial success and limitations, projecting your startup into a more robust growth stage.  

Having professional financial statements readily available will make it easier for management teams to make informed decisions about the company. Professional accountants are certified to present accurate data that your startup can trust.

Additionally, there are a number of specific accounting conventions that need to be taken into account when creating financial statements. While startup owners might possess the skills to create an amazing new product, they may not be able to focus all their time and attention on creating seamless balance sheets for the upcoming investors meeting.

Having professional financial statements allows a management team to make important decisions regarding their companies accurately displayed financial status.

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