Similar to how an odometer provides insight as to the proper running of your motor vehicle, the gas level, the temperature etc., financial statements highlight the status of your business at any given time. Monitoring the financial health of your company can make the difference between success and failure.
By properly scrutinizing your financial statements, you can avoid spending money that you don’t have and know when to deploy funds to drive your business to the next level.
Creditor and investors will want to look at your financial statements, including balance sheet, income statement, cash flow statement, and statement of owner’s equity, to what health your business is in and see if you are on track to reach your financing goals.
As a small business owner and tax payer, it’s very important to understand the three basic types of financial statements and the wealth of information they reveal to you and the extent to which they can provide insights as to your success or failure.
The income statement provides the business owner and other users with a picture of your business’s financial performance over a specified period, usually a year.
Sometimes this statement is also known as a profit and loss statement (P&L) or statement of revenue and expense, it shows the operating and non-operating income and expenses of a business entity.
Among other things, the information contained in an income statement can be used to calculate financial ratios that provide insights into your business’s performance.
A professional accountant preferably a Certified Public Accountant (CPA), can be of assistance to help you extract and use this information to setup your business for success.
Commonly referred to as a statement of net worth or a statement of financial position, the balance sheet is one of the essential financial statements. It is based on the basic accounting equation that states (Assets = Liabilities + Equity), providing the small business owner with a snapshot of the business’s equity, assets, and liabilities.
The balance sheet also highlights your business’s financial position at any specific point in time.
Financial statement analysts can use the information contained in the balance sheet to calculate several critical financial ratios. This will allow the business owner to make informed decisions.
The owner’s equity or retained earnings portion on the balance sheet details your business’ included earnings at the end of a financial period.
It shows the profit maintained within the company rather than distributed to owner at the beginning and the end of a specified operating period.
Retained earnings are used to either reinvest in the business or to pay off debt obligations. It provides insight as to the financial health of your business.
This is so because it indicates whether your business can meet ongoing financial and operating obligations without requiring the business owner to contribute additional capital.
The cash flow statement (or a statement of changes in financial position) gives the business owner an understanding of how well the business manages its cash flow.
Financial analysts can use the information in a cash flow statement to evaluate whether your business is generating sufficient cash to meet its debt obligations as well as operating expenses.
A typical cash flow statement provides information about your business’s cash from operating activities, revenue from financing activities, and investing.
Preparing for Business Success with Financial Statements
By preparing these three financial statements, you will be able to have a clear vision and provide prospective lenders, investors or creditors with the critical information they need to assess your business success. It will also afford the business owner that ability to make informed decision.
The business owner will also be able to identify trends in the company’s performance so as to help position the business for continued success.
Always work with an experienced Certified Public Accountant (CPA), to help ensure that your company is compliant with financial reporting and obligations throughout the year.
User | 21/06/2021