Financial statements: what they are, how to analyze them

One of the main activities and concerns in a company is financial management. After all, having a profitable company with good financial health is the greatest desire of every entrepreneur. However, to maintain a company’s financial health, management and accountability are necessary. This is what financial statements are for.

In this article, we will address this topic and tell you why you shouldn’t be afraid and the best ways to analyze your statements. Let’s go!

What are financial statements?

As stated in the paragraph that opens this article, financial statements are essential for good financial management in any business.

These are a set of documents and reports that group together the company’s financial data. They are used to monitor cash flow, taxes, profits, losses, etc.

When we talk about large companies, the strategic responsibility that is based on these reports lies with the CFO – Chief Financial Officer. In smaller companies, however, this responsibility is often shared between the accounting firm, a specialized consultancy and the company founder. In some cases, with a person who is responsible for finances, but does not yet hold an executive position.

Why are financial statements important?

As we have already mentioned, it is through financial statements that partners can monitor the company’s cash flow, taxes, etc. This makes decision-making more accurate, since there is more data that can help and indicate the paths to take.

Therefore, they are important to:

  • Assist in data-driven decision making ;
  • Asset documentation;
  • Compliance with accounting obligations;
  • Financing approval;
  • Increased financial strength of the company;
  • Organization of financial and accounting processes;
  • ROI (Return on Investment) calculation ;
  • Decisions of potential investors;
  • Sales forecast;
  • Strategic planning.

What are the financial statements?

A company’s financial statements vary according to its objectives, that is, for each objective, a different type of statement is required. See below the main ones and which ones are essential for your company:

Income Statement (IS)

One of the most important types of financial statements for a company is the Income Statement, commonly known by its acronym: DRE.

The DRE is the statement that presents profit and loss data for a period. These results can be presented monthly, half-yearly or annually, depending on demand.

It is worth remembering that this is a mandatory presentation and, therefore, must follow the provisions of Law 11,638/2007 . Furthermore, it is important to highlight that the DRE is a demonstration in net values.

Balance sheet

As the name suggests, the Balance Sheet is the type of financial statement responsible for accounting for a company’s assets. It is the balance sheet that will indicate the company’s market positioning.

This report is usually submitted at the end of the year. However, it may be submitted at other times when the company deems it necessary, such as in cases of merger or sale of the business.

This statement is divided into: active and passive. The first is the presentation of assets and rights and the second, the amounts to be paid. The difference between assets and liabilities is called net equity, which is the real value that the company has in assets after paying off its obligations.

Cash flow

Perhaps the best-known financial statement, the cash flow statement is the one that evaluates the inflows and outflows of a company. Since it is the company’s available cash balance, it is done more frequently than the previous ones. In the vast majority of cases, it is done daily.

Its objective is a healthy working capital, so that the company maintains its useful life for a long time.

To calculate cash flow, the company must consider all payments received in a period chosen by it, subtract all expenses, and finally, present the net monetary value in the report.

It is also worth remembering that, in some cases of “exits”, the same may, in reality, be an investment, so it is important to make a distinction in the reports.

Statement of Accumulated Profits or Losses (DLPA)

The Statement of Accumulated Profits or Losses (DLPA), as the name suggests, analyzes profits and losses in a given period and how they affect the company’s equity. This is the type of financial statement that shows changes in equity.

They can be presented individually or together with the Statements of Changes in Equity (DMPL). Regardless of how, the DLPA must be presented as set out in Law 6,404/76 .

Statement of Changes in Equity (DMPL)

Speaking of which, the Statement of Changes in Equity (DMPL) can replace the DLPA, and demonstrates the changes in a company’s equity. Among the things assessed in the DMPL are: expansion or reduction of the company’s capital reserves, capital integration and direction and origin of resources.

Statement of Added Value (DVA)

The demonstration of Added Value is what analyzes the generation and distribution of wealth in the organization.

It is calculated based on the difference in the value of production and inputs purchased.

It is not a mandatory demonstration report for all companies, but for publicly traded companies, it is mandatory to submit it annually.

Explanatory notes

Last but not least among the financial statements, we have the explanatory notes. These are documents with data that complement the other statements. They are usually requested by companies that do not feel satisfied with the data in other forms of financial statements.

How to analyze financial statements?

With the financial statements in hand, it is time to perform the analysis. To do this, the first step is to check the data. Then, regarding the structuring, it is important to check whether the information is arranged as required by law, which is as follows:

  • Accounting Standards (NBC);
  • Corporation Law;
  • Income Tax Regulation;
  • Fundamental Accounting Principles;
  • Rules decreed by the Central Bank and the Securities and Exchange Commission.

If something doesn’t look right, it’s time to make adjustments.

Adjustments made, it’s time to do the calculations to present the correct indicators and find the indexes.

So, it’s time to find patterns. To do this, it’s important to cross-reference information from financial statements. With all this, you can define periods of high and low in the market, periods of high and low in your business, and identify opportunities for expansion.

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