Why conventional accounts do not answer all questions?

An integrated understanding of all three components of a financial statement – Income statement, balance sheet and a cash flow statement is required to understand the operation of any business. The income statement reports profit or loss for a period. The balance sheet reports the company’s financial situation at all times; what the company owns and what it owes. The cash flow statement, on the other hand, tracks the movement of cash in the business by answering questions such as what contributed to cash flows and what contributed to cash flows. One should not treat all three statements as independent silos, but understand the relationship between the statements.

Let’s consider some contexts. Sales revenue is reflected in the income statement as sales for the period. Receivables are in the balance sheet, which indicate the value of receivables on a specific date. Receivables are amounts owed to the company’s customers. Companies sell on credit. If all sales are unlocked to customers for a period of time, the company may have a payout situation. Payout situation occurs when a company cannot meet its cash obligations. Technically, a business can make a big profit, but if the debt is not charged, it can go bankrupt. In some situations, the reverse may also be true. A company can buy the items it sells on credit, sell to its own customers in cash or by credit card, and pay its suppliers only after recognizing the proceeds of its customers.

A business manager’s job is therefore three times. Earn good profits, reflected by a growing profitability percentage and increased market share. Control assets and liabilities and keep them in a relatively stable position – this will be different from industry to industry, business to business. Finally, to ensure that there are no disbursements and the company is able to continue to meet its ongoing cash obligations.

Therefore, it is important for a business manager to understand the linkages to ensure maximum income and optimization of assets.