Financial Statements Simplified

Corporate turnaround specialists, Slatter & Lovett found that inadequate financial controls were responsible for 75% of business failures. That is, one or more of the following financial controls may be absent or inadequate:

  • cash flow forecasts
  • costing systems
  • budgetary control
  • monitoring of key performance indicators (KPI5)

and even when such information existed, management may not have understood how to use the information.

Why is this so? One of the reasons is that a large portion of management cannot ‘talk the language of business’.

Businesses exist to make a profit and to maximise returns to shareholders. So is it not essential that at least management understands what the financial statements represent and what the drivers of value are?

In this article we will look at the annual financial statements of a company and more specifically how the balance sheet, income statement and cash flow statement are created and intertwined.

We will achieve this by building up the financial statements as part of the process of a new business starting up and the events and requirements which unravel over time. The intention is not to cover every nuance, but rather to establish a framework and the basic principles thus enabling the user to better grasp the annual financial statements.

Published on  online in August 2012

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