Financial statements

In order to measure new venture’s current financial state, three important statements needs to be presented and analysed. The key factor investors will look at is if company’s income statement shows profit. Three financial documents are described below.

Balance sheet

This is a picture of assets, liabilities and owner’s equity at specific point in time. Assets are divided into fixed, current and other. Fixed assets include capital goods such as property and current are defined in terms of cash or items that can be converted into cash. Liabilities are divided into two: long-term such as loans and mortgages, and current i.e. expenses payable in one year. Debt ratio is calculated dividing total assets by total debt. The smaller the ratio, the better the financial health is.

Income statement

Profit and loss statement includes all income and expenses during a specific period. Income statement includes net sales; cost of sales and operating expenses defined as administrative costs not directly linked to producing or selling. Profit margin (return on sales) is then calculated dividing net income by set sales. Presented as percentage figure. The higher the rate, the more profitable the company is.

Statement of cash flow

Changes in cash during specific period of time, otherwise defined as statement of cash flow, presents operating, investing and financial activities. Operating activities include net income or less, depreciation and other changes in current assets and liabilities. Investing activities shows purchases and sales of fixed assets such as equipment and real estate. Financial activities indicate cash raised during borrowing or selling stock and paying dividends.

Adapted from

Westhead, P., Wright, M. and Mcelwee, G., 2011. Entrepreneurship: Perspectives and cases. Pearson.

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