An accounting statement is the written report of the financial condition of a company. It is the first step in formulating a financial management system. Accounting statements should be prepared every month to have a proactive approach. Financial or accounting statements have the following elements.
Income Statement
An income statement measures the sources of revenue and expenses of businesses.
Cash Flow Statements
Cash Flow Statements are the combination of income statements and balance sheets.
Balance Sheet: Gives a snapshot of business assets, liabilities, and equity of owner for a specific period. It is one of the most helpful tools in the financial management system. It is used to measure financial activity in a particular period.
Key elements of the balance sheet are:
- Current assets
- Fixed asset
- Other assets
- Current liabilities
- Long-term liabilities
- Owner equity
A Cash flow statement has four parts:
- Net cash flow from operating costs
- Net cash flow from investments activities
- Net cash flow from financing activities
- The net change in cash and marketable securities
The success of an entrepreneur lies in financial statements because financial statements provide details for better decisions. The progress of businesses can be assessed and measured from these statements.
Following are the advantages of accounting statements driven by successful entrepreneurs.
Predict Future Progress
Entrepreneurs make future predictions that attract and motivate others to work on that great vision inspired by them. Their predictions are based on three projections, i.e., assets, future revenue, and operating costs in the future. Financial statements provide an analysis of projections and allow the company to achieve goals.
In the initial stage of entrepreneurship, projections are used to make the team, providing them with a strong, practical, and measurable vision.
In the middle of businesses, financial statements are used as a measuring tool for determining the accuracy of projections. Sales and cost trends are assessed to make future predictions. A comparison of past sales and current sales is used to predict future revenue.
Similarly, understanding all manufacturing steps, supply chain, and delivery provides predictions of how the cost will affect future revenues. Bookkeeping is specifically helpful at this stage to make future predictions.
In late periods of entrepreneurship, financial statements reduce complexity and make it simpler to achieve goals and be more specific in the procedures and targets.
Future Commitment
To grow a business, entrepreneurs must make commitments. Commonly four types of commitments are made by entrepreneurs.
- Make investments for a fixed asset or a long-lived item. For example, machinery or building
- Promise for payment of a large amount for a specific period which may be rent of a fixed asset or salary of an expert
- Lending cash for expansion of the business
- Investments of working capital. For example, inventory management at a specific level or clients credit
These commitments are made to invest in such assets, reducing operating costs and capacity building to serve future demands. Money, time, and energy are utilized. Delivery procedures and sales funnels are designed to convert raw materials to a product required by clients. They are measuring the costs of all of these steps to help in making a practical commitment. Predictions and analysis of cash flow help you to prioritize commitments.
Measurement of Progress
Accounting or financial statements are used to measure the progress and make critical adjustments in entrepreneurship. Bookkeeping also provides clarity in the scenario.
The first step is the comparison of actual progress and projected progress. This comparison provides you with a report regarding achieving goals and targets set by entrepreneurs. Top performers can be rewarded if you measure progress accurately and determine individual contributions.
Progress measurement helps you to recognize problematical areas and bottlenecks. It helps in preventing fraud and making a strong, trustworthy, and motivated team. Progress analysis results in better decisions for the future.
It helps you recognize cost trends to identify the problem early and make corrections necessary to keep the business safe and on the expansion and growth track.
Conclusion
Accounting statements are the lifeline of successful entrepreneurship. Quarterly reviews enable business owners to make better decisions for achieving goals. Bookkeeping is also used as a tool to control and analyze progress.
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