An organization can make money and spend it wisely by reducing costs, increasing revenues, or both. But to do that, a company needs to strengthen its financial intelligence. And that starts with understanding the basic tools organizations use to depict their financial condition: financial statements.
The Importance of Financial Statements
Companies operate in different industries, may offer different types of services and offer all types of products, but the underlying purpose of all for-profit companies is to generate revenue and be profitable. An organization’s financial statements reveal critical insights into how well it’s doing.
An organizations financial health, its revenue sources, the nature of its expenses and its profitability can be revealed through its financial statements - the balance sheet, the income statement and the cash flow statement.
Regardless of whether the organization uses the accrual accounting or cash accounting method, or whether it’s in the private or public sector, it likely uses these financial statements.
- Accrual accounting: most companies use accrual accounting. Income and expenses are booked when they’re incurred, regardless of when payment from customers has actually been received or suppliers’ invoices have actually been paid.
- Cash-basis accounting: some companies, usually very small ones, start out using cash accounting. With this method, a company records transactions when cash actually changes hands.
As companies grow in size and complexity, it becomes more important to match revenues and expenses in the appropriate time periods. So companies tend to switch from cash accounting to accrual accounting.