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  • Writer's pictureGreat Companies

Understanding the Need of Financial Statement

Jul 27, 2017

Most small business owners don’t utilize their financial statements to manage their business. As a result, they are usually unable to read or understand their financial statements.

With solid understanding of the financial statements, a small business owner will know, and more importantly, understand on how to take action. Knowing what the numbers represent and what they are telling you, allows you, as a business owner, to succeed on purpose. The definition of business success means to achieve growing and sustainable profits. Without sustained profits, you’ll eventually run out of cash and be out of business.

Why is it important to Understand Financial Statements?

1.It allows the owner to do one of the most important things for the business, which is to create a profit plan for the business. It can also be called a budget, but budgets often miss a key component, which is the sales forecast and not just expenses. The profit plan is impossible to pull together if you don’t understand financial statements.

2.Generally, businessmen are aware about the amount of money they are willing to make in a particular period of time, but at the same time they are unaware of how to reach their desired goal. So, it is important for them to understand the nature of the transactions taking place in the business and all possess all other financial knowledge like debts, stocking up inventory, tax payment, and so on.

If you put a good plan together, it is surprising and exciting to achieve the plan and be focused. By understanding the financial statements, as a small business owner, you will begin to take management action to make things happen.

3.Acquisition of Funds, financial management involves the acquisition of required finance to the business concerned .Acquiring needed funds play a major part of the financial management, which involve possible source of finance at minimum cost.

4.Financial Decision, financial management helps to take sound financial decision in the business concern. Financial decision will affect the entire business operation of the concern. Because there is a direct relationship with various department functions such as marketing, production personnel, etc.

5.Improve Profitability; profitability purely depends on the effectiveness and proper utilization of funds by the business concern. Financial management helps to improve the profitability position of the concern with the help of strong financial control devices such as budgetary control, ratio analysis and cost volume profit analysis.

6.Increase the Value of the Firm, financial management is very important in the field of increasing the wealth of the investors and the business concern. Ultimate aim of any business concern will achieve the maximum profit and higher profitability leads to maximize the wealth of the investors as well as the nation.

7.Promoting Savings, savings are possible only when the business concern earns higher profitability and maximizing wealth. Effective financial management helps to promoting and mobilizing individual and corporate savings. Nowadays financial management is also popularly known as business finance or corporate finances. The business concern or corporate sectors cannot function without the importance of the financial management.

Running a company successfully is not nearly as hard as some people make it out to be. Understanding your numbers is a key first step to simplifying that process.

You don’t need to become an accountant or CPA to read a financial statement, but you need to know and keep tabs on the numbers to run your company and achieve your profit plan.

At the point of knowing that they fully understand their business, the realization surfaces that business owners can steer their business in the direction for sustainability, success and profits. That is powerful!

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