Usually in India we find entrepreneurs engaging an accountant to maintain the books of accounts either manually or using software. The most common software product used in India is ‘Tally’. While most software tools provide the option to generate a statement for any period as defined by the user, most often they are never used. Entrepreneurs depend on the chartered accountants at the end of the year to prepare them for the sake of regulatory and compliance requirements. There are number of entrepreneurs who don’t even look at them and understand them – all they do is sign it on the day prior to filing to the regulatory body.
Accountants have gone on to define a financial year (01st April to 31st March in India) as a period for regulatory purposes. In different countries the regulatory periods are different (Example: 01st January to 31st December in USA). Every registered company needs to prepare and submit a copy of its performance for the financial year. We will not get into the regulatory requirements of preparing and submitting these statements. They are mandatory requirements based on the laws of the land. One needs to adhere to it so as to protect the reputation that an enterprise has or intends to build.
Apart from regulatory requirements, entrepreneurs almost never prepare these statements. This is why the power of financial statements in business decision making is never seen. Early stage companies in particular and entrepreneurs in general must prepare these statements (Income statement, Balance sheet, and Cash flow statement) on a monthly basis. If you (the entrepreneur) are not the one maintaining the accounting software, then request your accountant to print a copy of the above statements for you every month.
Once an entrepreneur starts looking at the statements on a monthly basis, he or she is bound to get comfortable looking at them. One starts recognizing their structure, the terms used, the places where they tend to appear, and connections between the statements. These are the first step in becoming financially literate. During the early days of the business, the statements may not look too exciting from the view of a financial analyst. One must refrain from comparing the statement with those of large companies and attempt to draw parallels. These are dangerously wrong practices that can hurt the utility value of financial statements and the literacy that comes from learning to read them.
The act of regularly printing and looking at statements (at least monthly) is a discipline that entrepreneurs must develop. It is almost like a ritual. Doing this will increase confidence and help make connections across statements and time periods. Entrepreneurs will be able to locate trends and possibly extrapolate some of the financials into the future. This will help entrepreneurs estimate financial requirements early and be prepared for them by taking suitable actions.