Finance Reviews

Financial statements are important in every accounting process. These are basically made to evaluate the current financial progress in order to estimate the future growth. Widely used across businesses, banks, non profit organizations, financial statements are essential in terms of laying down company’s plans for achieving the set business expansion goals and objectives. How to make an ideal financial statement? There are broadly four types of financial statements that every business prepares namely, the income statement, the statement of cash flows, statement of retained earnings, and balance sheet. Let’s understand how it goes with every financial statement.

Firstly, the income statement incorporates the entire details of a company’s from its net income to net loss. Net income is basically the gross funds that are accumulated by the company during a particular accounting period. Whereas, net loss refers to the loss of funds that the company has incurred during an accounting period. Income statement is then produced for the net profit and loss along with the summary and respective dates.

Secondly, the Cash flow statement which includes all the facts pertaining to cash flows. Generally, funds are used for purchasing new machinery, material, for paying wages to labors, and for similar other business activities. Cash flow statement is produced to analyze all the cash that is flowed out and brought in during an accounting period. By this, the business gets a true picture regarding company’s total earnings.

Third is the statement of retained earnings that depicts how the retained earnings have been modified over an accounting period. This form of statement records data pertaining to the increase and decrease in the retained earnings. Another record that stores such information is the dividend account. Dividends are usually profits that a business has made and that are to be remunerated to the company’s stockholders.

In the end comes the balance sheet. As the name suggests, it is a statement that underlines all the account totals for the company. This means showing the entire record of all the financial transactions that are made throughout an accounting year. This sheet contains two columns or accounts, namely assets account and liabilities account. The asset account includes assets purchased, cash flows, accounts receivable, prepaid insurance, depreciation accounts, supplies on hand and more.

The liabilities and equity accounts are clubbed together and consist of accounts payable, notes payable, unearned revenue, capital stock, retained earnings. The sum of liabilities account is taken out along with the total of equity account and the gross figure is summed out. When the total of total assets is matched with the total of total liabilities and equity, the balance sheet is finalized.

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After the Global Financial Crisis(GFC), a lot of people questioned their personal financial planning strategies. People often do this after a market downturn or correction, let alone after the biggest we have had in about 70 years. Anyone who has lived through other major downturns will know it will take a few years to recover investment losses. It is natural for people to wonder if their personal financial planning strategy is still the right way to go.

Is your strategy sound?

If a financial planner, as part of a comprehensive financial plan, recommended your investment strategy, then your strategy should be sound. The recommendations would have been made after he or she completed a fact find about your situation. This would have taken into account your investment time horizon and you investor profile. Your investor profile is determined by a series of questions to find out your tolerance to investment risk. In this case, investment risk refers to the exposure to short-term market fluctuations. The recommended investment portfolio would have reflected your risk tolerance by limiting your exposure to growth assets – shares and property – whose values do fluctuate with market movements.

How Long Should You Stick with an investment strategy?

You should stay with the original strategy for the length of the plan. If you have a ten-year plan then you stay with that. There is no doubt, staying with an investment strategy for the medium to long-term works best. The other alternative is to try to pick the market. This means, moving into a safe investment when the market drops and then moving back into the market when it goes up. The problem is most people cannot get the timing right – they are usually too late to get out before the market dropped or to get in before the market went up. Even the professionals have trouble picking the market. How many picked the global financial crisis?

Tough out the Tough times

The hardest part is to have faith in your original financial planning strategy when the market is moving against you. It is well to remember that is the nature of financial markets. Both the share market and the property markets have around 5 – 7 year cycles. Over the long-term, both these sectors make money. That is why your strategy would have been designed for a particular time frame, so that your portfolio could ride out those downturns. Generally, the only people who lose during market downturns are the ones who panic, sell the investments at a loss and put the money into a safe place. They are unlikely ever to get their money back. If you and your adviser worked together to form an investment strategy or if you did it yourself after doing your research, you should give the growth assets in your portfolio time to grow by staying with the origianl personal planning strategy.