Introduction
Following the exit of the immediate former Chief Financial Officer, there is a felt need to make everyone in the organization aware of some of the general terms the organization uses in its financial management system. The following five terms are the most important ones.
Balance Sheet
A balance sheet is a financial document that gives a summary of the assets, liabilities and the amount of money the company has from its shareholders. The basic equation that explains the relationship between these three variables is assets are equal to liabilities plus shareholders equity. In other words, the money a company owes and the money its shareholders made available for business is equivalent to all the money the company controls. In this example, money represents assets, although it is important to note that money is not the only type of asset to a company. The two sides of this equation must balance hence the name, “balance sheet”.
Income Statement
An income statement shows the profits and losses a company generated in a typical period, usually a financial year. This helps the company to determine whether its operations are sustainable or not. The statement usually compares total revenues to total expenditures to determine the profitability of the enterprise. If the final figure is positive, the company made a profit in the period under review, and if it is not, then it made a loss. Another name for the income statement is the profit and loss statement. This document is the one that shareholders study to determine whether their investment is paying off.
Operating Cash Flow
The operating cash flow refers to the money a company generates from its operations. The difference between the revenue the company generates and the expenses it incurs constitutes the operating cash flow. Its calculation requires some adjustments to net income. In a sense, it is similar to the working capital because it has a short-term perspective. The difference between the operating cash flow and working capital is that it does not consider the magnitude of the assets and the liabilities. It just looks at the way revenue comes to the company and the way the company handles its operating expenses.
Statement of Retained Earnings
The statement of retained earnings gives an overall picture of the net profits that the company has kept. These are normally the net profits that the company has not decided to distribute to shareholders, or the money it wants to keep to make it ready to take advantage of upcoming opportunities under consideration. The reason why there is need to have a statement of retained income is that lack of this statement exposes the company to risk of fraud and pilferage. If the company retains some money instead of distributing it to shareholders, it is possible for someone to access the money and siphon it off the organization because it will not show up in the books of accounts.
Net Working Capital
It is important for a company to know whether it can meet its day-to-day obligations. These obligations include paying off its current liabilities. Working capital refers to the difference between a company’s current assets and it current liabilities. If this answer yields a positive answer, then the company can meet its current obligations. However if the analysis yields a negative answer, then the company will be unable to meet its short-term obligations.