Page 129 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Entrepreneurship and Small Business Management

Notes Introduction

In the previous unit, we dealt with the steps for starting a small business enterprise. This unit
will help you to understand the financial statements and business ratios. The various sections
and sub-sections of this unit will also summarize the sources of finance and managing cash
flows. Whenever there comes an idea of launching a new venture, the first thing that comes in
mind is how to avail the required money for the proposed venture or business. Finance is the
life-blood of a business enterprise or an organization. Also the success and failure of the new
venture to a great extent remains dependent on the financial planning. Therefore, it is very
important for every entrepreneur to draw up a financial plan at the starting stage of his new
business or venture. A well defined clear cut plan will help in determining the need of finance
at different stages of business.

9.1 Financial Statements

Financial statements are necessary sources of information about companies for a wide variety of
users. Those who use financial statement information include company management teams,
investors, creditors, governmental oversight agencies and the Internal Revenue Service. Users
of financial statement information do not necessarily need to know everything about accounting
to use the information in basic statements. However, to effectively use financial statement
information, it is helpful to know a few simple concepts and to be familiar with some of the
fundamental characteristics of basic financial statements.
Following are the four main accounting statements:

9.1.1 Balance Sheet

The Balance Sheet is a statement detailing what a company owns (assets) and claims against the
company (liabilities and owners’ equity) on a particular date. Some analysts take the balance
sheet as similar to a snapshot illustrating a company’s financial health. Keeping in mind the
assets and claims, it is helpful to remember the “left–right” accounting equation orientation –
assets on the left side, claims on the right. In addition, there are a number of other characteristics
of the balance sheet that are noteworthy, such as balancing, order of listing, valuing of items,
and definitions of items.
The balance sheet must balance – that’s why it’s called a balance sheet. In other words, the assets
must equal the claims on assets.

Did u know? The concept of balancing relies on the accounting equation:
Assets = Liabilities + Owner’s Equity
Each of the three segments of the balance sheet will have many accounts within it that document
the value of each. Accounts such as cash, inventory and property are on the asset side of the
balance sheet, while on the liability side there are accounts such as accounts payable or
long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as
there is no one set template that accurately accommodates for the differences between different
types of businesses.

Notes A company has to pay for all the things it has (assets) by either borrowing money
(liabilities) or getting it from shareholders (shareholders’ equity).

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