Entrepreneurs: Five statements to learn inside out

Entrepreneurs: Five statements to learn inside out


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Financial statements
Published on 21 January 2019
Reading: 4 minutes

Entrepreneurs: Five statements to learn inside out

During the development and start-up phases, entrepreneurs often have to try their hand at pretty much everything! They often wear several hats, such as recruiter and sales agent. And while it may not be their cup of tea, entrepreneurs have little choice but to learn the basics of accounting. Here are five financial statements you’ll need to know inside out for successful negotiations with your banker.

1. Statement of income

The statement of income, or statement of profit and loss (P&L), shows the profitability of a company for a given period. The first section of the statement summarizes total revenue and the second, all operating expenses in relation to previously recognized sales. The bottom line reports net income (or net loss) for the period. To calculate net income before income taxes, simply subtract all operating expenses from total revenues for the period.

Net income contrasts all the transactions that generated your SME’s wealth (such as recognized sales and grants received) against the transactions that reduce your profits (such as cost of goods sold, salaries and employee benefits, rent payable for premises, etc.).

While it’s not uncommon for development-stage companies to recognized a financial loss in its first few fiscal years, recurring profits from period to period will be the measure of your long-term viability, not to mention the key to getting more attention from your bank manager!

2. Balance sheet

This statement provides a quick overview of a company’s assets, liabilities and shareholders’ equity at a given point in time (usually stated at the top of the balance sheet). Together, this data also tells investors how much money shareholders have invested. Think of balance sheet as a snapshot of your SME’s current finances.

The balance sheet shows the value of your assets (cash resources, accounts receivable, prepaid invoices, inventories, equipment, property, plant and equipment and intellectual property) and liabilities (line of credit, bank indebtedness, accounts payable, mortgage and taxes payable). Remember that this financial statement, as the name indicates, is always “balanced”: total assets are equal to total liabilities and shareholders’ equity.


3. Statement of shareholders’ equity

Shareholders’ equity represents what common shareholders have invested in the company, whether directly or through the reinvestment of income. It consists of of the initial share capital, additional contributions, retained earnings and shareholder loans, but excluding preferred share capital. In simpler terms, owners’ equity is composed of the total investment plus the income generated by the company (less any realized losses or withdrawals by the owners).

These first three financial statements are closely connected to each other. The statement of income is related to the balance sheet as a result of the impact of the income or loss realized during the year on owners’ equity.

4. Statement of changes in financial position

In business, much reference is made to cash flows. The statement of changes in financial position provides a summary of cash flow positions. It shows were cash flows are provided (cash inflows) and used (cash outflows) for a given period.

This cash flow reporting tool indicates the amounts of the company’s cash receipts and outlays each month, as well as the months in which it records a surplus or deficit. With this statement, you can determine the amount of working capital you need to meet your obligations.

5. Statement of retained earnings

This financial statement indicates which items resulted in a change in income on the balance sheet during the year in question. Retained earnings represent the amount of cumulative amount of annual profits once taxes and shareholder dividends have been paid. Retained earnings also appear under “shareholders’ equity” in the balance sheet. Companies often reinvest their retained earnings to strengthen their working capital or purchase new equipment.

Put on your accountant’s hat!

You don’t need to understand the finer points of accounting to be a successful entrepreneur. That said, taking a hands-on accounting course to hone your skills is time well spent. In addition, don’t hesitate to seek expert advice: a professional’s services can be worth their weight in gold!