The Roadmap: Financial Statement

A strong business is built on a solid and well-planned financial studies; irrespective of the business scale. The key concepts of financial statements will be listed and elaborated in the next paragraphs.

Understanding the sources of cash and statement of cash flow:

1. Cash inflow: occur when we sell a product (decrease in the inventory while increase accounts payable)
2. Cash outflow: occur when we buy something (increase in asset account while decrease liability or account equity)

The importance and necessity of standardizing the financial statement for performance review. The income statement (Profit or Loss) is calculated for a period of time (yearly). Hereunder the main parts of an income statement:

1. Revenue: the inter income, before calculating any expense, after carrying any business (selling a product)
2. Cost of goods sold (COGS): the direct costs for purchasing or producing a product
3. Expenses: the money spent to run a business (such as admin, sales, warehousing and distribution)
4. Depreciation: the loss of asset value over a period of time (such as generator and vehicles)
5. Interest expense: the non-operating expense incurred by the company for borrowed money (loans)
6. Net income: the amount of money left for the company after deducting all costs, expenses, taxes and interest

Financial ratios calculations and interpretation for better comparison between companies. Ratios are used to highlight strengths and weaknesses. The two major ratios categories are:

1. Liquidity; the ability to make the required payments by acquiring cash through a loan or converting assets to cash

Current ratio = Current asset / Current Liabilities

Cash ratio = Cash / Current Liabilities

• Profitability; the money earned in relation to the expenses (sales price must exceed unit cost). There is a positive relation between the sales and volume of goods sold.

Profit margin = Net income / Sales

ROA (Return on Asset) = Net income / Total assets

ROE (Return on Equity) = Net income / Total equity

The top financial manager in an organization is usually the Chief Financial Officer (CFO) in charge of overseeing the cash and credit management, expenses and costs as well as the taxes. In addition to the strategic decisions related to capital budgeting and structure such as the long-term investments or projects should the business take on. Or how should we pay for the assets (debt or equity).

The main goals of any organization are to maximize the profit and minimize the cost for sustainability. Furthermore, the firm should keep studying the market changes and ensure diversity of business activities. While keeping in the mind the risks behind each decision by considering the existing competition in the market.

No doubt that the global inflation (increase in prices) and currency devaluation (lose of value in relation to other foreign currencies) in some countries reduced the purchasing power of the people having fixed salaries. For example, the petrol price increase which led to a spike in the employees’ transportation and household expenses while their minimum wages remained almost the same.