How company’s Profit & Loss, Balance Sheet Statement works and READ like a Pro:
2. How Investors, prospect shareholders or bankers in viewing P&L Statements?
Investors and lenders use the financial statements in calculations to determine a company’s risk level. To apply for loans, companies must provide evidence of their strong financial standing and ability to commit consistent payments. If the P&L statement reflects that a company does not create enough income to adequately cover existing loan payments, banks are less likely to loan additional funds.
3. How to Read like a Professional?
a. Balance sheet
The balance sheet as to see the available resources and how the are being financed as to the Financial Year. It shows the total assets owned in monetary value, liabilities owes to debtors and also owners’ equity (the investment by the shareholders). The higher the owners’ equity, the better of the Company’s net worth.
b. The Profit or Lose Statement (Income Statement/ P & L statement)
i. A summary for the total revenue and expenses which leading to company in making profit or lose at the end of the Financial Year. Commonly, owners used to make comparison between years as to check the business performance or bench-marking with similar industries. Secondly, to check if the time worth being spend on the business and available cash being generated by the business for sustainability in short or long term.
ii. Technically, P & L consist the following business information:
– Sales/ Revenue: The money being generated in;
– Expenses: The expenditure by the Company;
– Cost of Goods Sold (COGS): The cost of expenditure in producing a product for selling;
– Gross Profit: Total Sales/ Revenue after deducting COGS;
– Operating Income: Gross Profit deducting business expenses;
– Income before Taxes: Operating Income deducting non-operating expenditure;
– Net Income: Total Income before taxes deducting taxes;
– Earnings Per Share (EPS): Dividing the Net Income by the total shares holding by the member;
– Depreciation: The assets (vehicle, machinery or equipment) in losing the purchased value over the time;
– EBITDA: Earnings before interest, taxes, depreciation and amortization.
c. Reading Cash Flow
The purpose of reading is to get a detailed financial information of the current health status of the business’s cash during a specific financial year. Reader will able to make financial decision based on the Company’s ability to operate either in short or long term and expectation for future cash collection too. A point to be note that, cash flow is different with the P & L statement where cash flow is focusing of cash in and cash out while P&L referring to cash remaining after sales deducting all expenses.
Cash flow statements are been seen as 3 parts namely:
– Cash flow from operation works: A detailed cash flow once sales transaction had been delivered to the customers inclusive of sales and expenditures;
– Cash flow from investment: A cash flow resulting from buying or selling of assets as such properties, patented trademarks or vehicles through using cash and not through financing;
– Cash flow from financing: Cash flow from debt and financing through equity.
4. The key takeaways after mastering the read up of Financial Statements?
a. The Company’s debt and the ability to servicing it within the require time frame.
b. Profit or Lose for the financial year.
c. Bench-marking either with year to year or similar industry.
d. The amount invested and the growing of equity aka worth per share.
e. Total expenses comparing to revenue generated from the business expenses.
5. Reading Annual Report for Public listed Companies at Bursa by shareholders:
a. An annual report is required by the Securities Commission in publication for the shareholders in knowing the operational and financial health of the Company.
b. It includes Company’s images, CEO’s messages, activities, pipelines and goals where the objective of reading is to provide a better understanding about the Company mission and objectives.
c. An annual report shows the summary of financial information, P & L, Balance Sheet, Cash Flow, management’s planning, SWOT analysis, Directors & Executives compensation, current market and Company’s policies.
6. 6’s Most basic must-know by Business Owners from time to time:
a. Total monthly sales according to the product; date like the trend for daily, weekly and monthly. Do either upgrade the product or “kill” the product if it is not making traction.
b. Total collection by month if is showing positive collection or in bad shape.
c. Total creditors by month end through Creditors Aging Report where to manage so that, the supplies are arriving on-time.
d. Total debtors by month end as to check if the debtors are increasing or not which eventually weakening the business’s cash-flow.
e.Total inventory by month end as to avoid over stocks, leakages, stolen and wastage. Over stock will be creating burden to the cash-flow while lack of stock will be putting the production or retail sales in jeopardy.
f. Total cash at bank & on hand as we must know how to differentiate the cash in nature: petty cash, floating money, cash in transit, saving, current and Fixed Deposit. All money is not the same in nature.