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Finances are one of the essential bases in a company and even in our personal management; for this reason, Fellito José has agreed to help us with this subject. We will be publishing monthly articles on the world of finance: the economy in its most global concept to practical cases in accounting and finance or strategic reflections. The series will be called ABC Finance: Financial Education and Fitness and the first topic will be, Financial Analytics.
For a few years, we have seen how the word entrepreneur, the one who resolutely undertakes innovative actions or companies, has been used more frequently. More and more people have begun to identify opportunities where others see problems or simply do not see them, and have taken it upon themselves to organize the necessary resources and manage them in order to achieve their goals. For this, it is essential to be organized and plan, however, the mistake of many is to leave aside the financial organization, which is of vital importance regardless of whether the business is recent and has not yet been registered. From the beginning, you should think of any project as a company and develop it with that vision of growth.
Finance is defined as the art and science of managing money. In the business context, finance involves making decisions such as how to increase investors’ money, invest money for profits (profits), and how reinvest company profits or distribute them to investors.
To have effective control and management of this, the so-called financial reports are essential, which are nothing more than accounting records of their economic operations. These records allow you to have control over income, costs, expenses, and investments; that is, the money that enters and leaves the company.
Standardized reports of their financial activities are prepared from the accounting records. The guidelines used to prepare and update financial records and reports are known as Generally Accepted Accounting Principles (GAAP). The reports in a duly constituted company must be prepared and reviewed periodically and these are delivered to the regulatory bodies, the creditors (lenders), the owners, and the administration.
The four key financial statements you must have are:
1-The profit and loss statement or income statement.
The profit and loss statement or income statement provides a financial summary of the company’s operating results for a specific period.
2-The balance sheet or statement of financial position.
The balance sheet presents a summary statement of the financial position of the company at a specific time. The state weighs the company’s assets (what it owns) against its financing, which can be debt (what it owes) or equity (what the owners contribute).
3-The statement of shareholders’ equity.
It shows all the transactions of the patrimonial accounts that occur during a specific year.
4-The statement of cash flows.
Provides a summary of the operating cash flows of the company’s money inflows and outflows.
These should not be a document that is simply reflected in a spreadsheet, but must be analyzed to know the performance of the company. It should be noted that the analysis of the financial statements is based on the use of ratios or relative values, in other words, an analysis of financial ratios must be carried out.
Analysis of financial ratios
The information contained in the four basic financial statements is very important to the various stakeholders who need to know on a regular basis how the business is performing. The analysis of the financial statements is based on the use of the ratios or relative values which include methods of calculation and interpretation of the financial ratios to analyze and monitor the performance of the company.
This article is a contribution from Fellito José, MBA in Finance at Vértice Business School, Málaga, Spain. More than 20 years of work experience with management positions in commerce, hardware, microfinance banking sector, and AFP. Currently CEO and founder of INCOFI SRL, a company dedicated to business management training for MSMEs and entrepreneurs, financial consulting, and business plan design. Contacts:Personal: 809-961-2133 WS and Telegram Email: [email protected]