Wednesday, April 14, 2010

Understanding Financial Statements

Companies do many things: build cars, process data, provide services, even launch satellites. But the underlying purpose of all for-profit companies is to make money. As a for-profit manager, your job is to help the company make money—preferably, more money each year. Even if you work in the nonprofit or government sectors, where net income is neither the only nor the most important bottom line, it is still vital that you carefully monitor how much money comes in and where it gets spent.

You can help your company make money by reducing costs, increasing revenues, or both. The best managers don't just mind the budget—they look for the right combination of controlling costs and improving sales.

How's your company's financial health? Where does its revenue come from, and where does it spend its money? How much profit is it making? Companies provide answers to such questions in three documents, called financial statements: the income statement, the balance sheet, and the cash flow statement. Publicly traded companies make these statements available to everyone—shareholders, industry analysts, and competitors as well. As a result, they are not as detailed as the company's internal financial statements.

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