If you are running a business, you must know that financial statements will form a significant part of your organization’s reporting process. Decoding financial statements will give you an overview of the company’s financial performance, and cash flows and enable stakeholders to make informed decisions. 

However, decoding financial statements can be full of challenges. Our business finance consulting services can assess and handle all the financial nitty gritty for you so that you do not have to deal with these complex challenges. In this blog, we will discuss some of these common challenges and how you can tackle them.

5 Challenges In Decoding Financial Statements

These are some of the challenges entrepreneurs face while decoding financial statements:

1)Accuracy and reliability: Decoding financial statements requires you to be finicky about the smallest of details. You should be able to identify any missing links, errors and discrepancies. It is a tedious task, and entrepreneurs need to have an idea of the accounting principles to overcome this problem.

2)Lack of standardization: The accounting methods and reporting standards across different organizations may vary, as per industry. It can make the decoding of financial statements even more challenging. To avoid this issue, you need to study the accounting standards within your industry in depth.

3)Hidden and contingent liabilities: Entrepreneurs may often overlook any contingent or hidden liability explicitly not stated in the financial statement. There could be warranty claims, potential lawsuits, and potential tax liabilities hidden in financial statements, if overlooked can cause serious financial implications to the entrepreneur. 

4)Interpretation of financial metrics and ratios: As an entrepreneur, you might find it difficult to interpret ratios like current ratio, debt-to-equity ratio, ROI, etc. The solution to this challenge is to get a solid grasp of the financial analysis principles.

5)Overloading of technical jargon: If you are an entrepreneur without an accounting or finance background, phrases like “accrual basis”, “EBITDA”, and “amortization” might be confusing to you. To decode financial statements effectively, equip yourself with financial terminology beforehand.

Managing core business along with handling all these additional technical complications can get too hectic for an entrepreneur. Instead, you can delegate these technicalities to our business finance consulting services so that you can focus on your business operations.

Beginner Guide For Understanding And Decoding Financial Statements

Here are some of the strategies you can apply while decoding the financial statement of your business:

–Gain an understanding of all the items on a balance sheet: Your business’ financial statement at any point will include the assets and liabilities of your company and the residual value for shareholders over a specific period (monthly, quarterly and yearly). So make sure you have a clear understanding of what assets, liabilities and equity include so you know your organization’s current profits.

–Know about the income statement components: The income statement of a balance sheet has so many components like Cost of Goods Sold (COGS), gross profit, revenue, operating income, operating expenses, net income, etc. You need to know these concepts clearly before decoding a financial statement.

–Have an idea of the cash flow statement movements: To decode a financial statement, you should have a clear idea of terms like “operating cash flow”, “investing cash flow”, “financing cash flow”, etc. Operating cash flow is the cash your business uses in its day-to-day operations. Investing cash flow is the cash utilized in investing activities like buying or selling assets like equipment or property. Financing cash flow occurs during transactions with creditors, shareholders, lenders, other parties, etc.

Some Additional Tips For Making The Process Of Decoding Financial Statements Easier:

-Sign up for industry newsletters and webinars and join professional circles so that you can stay up to date with all financial regulations and compliance standards.

-Learn financial trend analysis by examining patterns of changes in your company’s financial statement over time. You also need to learn the process of ratio analysis.

Even though you know the basic framework for decoding financial statements, you still might not have the time to do it all by yourself. Our business finance consulting services are here to handhold you through the entire process and make it easier for you.