Understanding the core financial concepts is critical for the success of your business.

Poor financial management is one of the main reasons for business failure.

The financial function in any business, is concerned with the flows of money in and out of the business.

The main reason for running your business is to make a profit (unless you are a non-profit making organization). Profit is why your business exists. You therefore need to run a financially viable business.

This means making profit in the long term and managing your cash flow i.e.. remaining solvent in the short term. There are numerous financial issues to consider and in this module we will look at the basic financial statements i.e. the income statement and balance sheet as well as budgeting and preparing a cash flow statement. These are important tools which you will use to manage the finances in your business.

Financial statements report financial performance and position of the business. They need to be used to plan the route to financial success.

They also help on how to identify if your business is performing well by analyzing the financial statements and calculating important ratios.

The Income Statement
An income and expenditure statement reflects the financial performance of a business in terms of income and expenses, and profit made or loss incurred by the business over a particular period. It is also known as the Profit and Loss statement.

The Balance Sheet
The balance sheet reflects the financial position of the business at a particular point in time, e.g. at year end. It therefore gives a snapshot of your business because it gives you a picture at a certain time, but does not reveal how you got there.

Analyzing Financial Performance
Once you have mastered the basic financial statements, you will want to analyze the financial state of your business. If you are applying for a bank loan or overdraft, the lenders will also want to look at your financial position.

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