Its the painful unsexy part of business but its also the most critical skill for success.

Everyone should have a basic understanding of Financial Statements. There are three of them: Balance Sheet, Income Statement, and Cash Flow Statement. You need to know what they are and what information they provide.

It’s a competency that can open up career opportunities. Financial Statements are the basic language of money and business. You will understand business much better with this basic skill.

This knowledge can be impactful for the quality of your career, job prospects, and life. Executives discuss financial data with marketing, operations, and other direct reports and personnel. You limit your career if you can’t contribute to this strategic conversation.

How much do you understand about finance and the numbers? Recent research concluded most managers don’t understand enough to be useful.

Check out this quick diagnostic test to see how you stack up.

Three Financial Statements

There are three main financial statements. They interconnect and flow. Together they provide a picture of the health of an enterprise.

“Accounting is the language of business” Warren Buffett

Financial statements are what accounting “makes”. They are the end product of accounting. Financial Statements are the reports generated by accounting. They cover all the transactions of an enterprise.

The three basic financial statements are:

The Balance Sheet shows a firm’s assets, liabilities, and net worth. It is for a stated date like the beginning or end of year.

The Income Statement, which is also called the Profit and Loss Statement or the P&L for short.

It shows the Revenues, Expenses and the Net Income (also called profit or earnings) of the firm. It covers a stated period of time like a month, quarter or year.

The Cash Flow Statement details the inflows and outflows of cash. It reconciles the Income Statement to how much money the firm has in the bank.

The income statement and cash flow statement examine a firm’s activities. They report the activities for a stated period of time.

Knowing how to read and understand financial statements is a business skill you can’t ignore. It can help working your way up the corporate ladder. You will be able to understand and communicate the big picture.

Check the company financials when you are contemplating a job offer, or changing jobs. Make sure you are hitching your cart to a healthy organization.

If you are starting your own company you need to have financials prepared. Accounting is the language of business. Financial Statements are how you talk to investors, banks, suppliers and vendors.

Wealth Creation

Analyzing financial statements is a critical skill if you want to invest wisely in the stock market. Publicly traded companies report their financials on the Securities and Exchange Commission website. Check out any public company’s most recent 10K filing there. Get an idea of how they are doing.

“You have to understand accounting and you have to understand the nuances of accounting. It’s the language of business and it’s an imperfect language, but unless you are willing to up in the effort to learn accounting — how to read and interpret financial statements — you really shouldn’t select stocks yourself.”

Warren Buffett

Interested in a thorough understanding of these concepts? Check out my books Learn Accounting Fast! and Reading and Understanding Financial Statements.

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