Financial statements are critical to a business owner. They provide much-needed information on the financial status of the business and provide input into wise and timely decision-making. Financial reports are usually prepared at the end of each quarter and fiscal year.
These financial statements are used by management, stakeholders, investors, creditors, and debtors to gain insight into the financial status of your company. They are the basis for making decisions on purchases, loans, and other activities related to the growth and operations of your business. Also, if you decide to list your company on the stock exchange, you’ll be required to present financial statements that are based on the accounting principles adopted by the country in which you operate.
Types of Financial Statements
There are five basic types of financial statements, the top three being the most important.
1. Income Statement
Also referred to as the profit and loss statement, the income statement documents revenue and expenses for the company. It measures the performance of the business by listing all sales and expenses for the period.
Management or business owners should compare their quarterly income statements for any big changes between them. By keeping careful track of fluctuations and differences, you can look at ways to reduce expenses, if necessary.
2. Balance Sheet
The balance sheet lists a company’s assets and whether they are financed through debt or equity. It is also known as the Statement of Financial Position because it provides information on assets, liabilities, and equities.
Balance sheets are usually prepared at the end of the accounting fiscal year. It reflects a snapshot of the company at that particular point in time. Business owners and managers should compare each balance sheet with the last one for significant changes so that anomalies can be addressed. For example, if inventory is growing faster than sales, you can investigate ways to more quickly convert it to sales.
3. Cash Flow Statement
The cash flow statement for your business shows how money moves in and out of the company. The statement can include three different types of cash flows:
- Operating cash flows indicate the cash flows related to revenues and expenses.
- Investing cash flows include investments made in long-term assets.
- Financing cash flows relating to stockholders’ equity and payment of dividends.
The information provided by cash flow statements helps determine how much money is available to pay creditors.
4. Statement of Stockholders’ Equity
If your company is listed on the stock exchange, the statement of stockholders’ equity is a useful tool. It uses balances on the balance sheet to measure and explain changes in the value of shares to stockholders’ equity or ownership interest in the company. These changes are typically a result of dividends distribution, new stock issuances, and repurchases of treasury stock.
5. Statement of Comprehensive Income
Managers and business owners can determine possible sources of cash in the future with the help of a statement of comprehensive income. This statement provides information on comprehensive income that isn’t included in the income statement, like unrealized gains/losses, pension, investments, and foreign currency transactions.
Why Accurate Financial Statements Are Important
There are several reasons why it’s critical to maintain and use detailed financial statements for your business to thrive.
1. Financial Transparency
Keeping track of your company’s financial status is vital to its success. Assets depreciate in value. Cash flow sources vary. Figures like Profit before Tax, Profit after Tax, and Profit after Interest, Depreciation, and Tax are all important numbers in these reports that provide valuable information to shareholders and management.
2. Evaluate Tax Liability
Your goal is for your business to prosper. However, profits are taxed at a high rate, so your net profit can decrease considerably. Financial reports can help when looking for ways to reduce your tax burden.
3. Mitigate Errors
Accurate financial statements can help you detect illegal or shady activity, as well as catch costly mistakes. By analyzing the numbers, you can find errors before they cause too much damage.
4. Build Trust
Investors, lenders, and bankers all look for accurate financial statements and reports from companies they do business with. Government regulations on compliance with mandatory reporting have become more stringent due to problems in the past from larger companies hiding, misreporting, or fudging numbers.
5. Improved Payment Cycles
Your business’s accounting figures must be up to date to facilitate outgoing payments like salaries and wages, dividends to shareholders, inventory needs, and payments to creditors. Accurate numbers make it easier to get these payments made.
6. Better Decision Making, Planning, and Forecasting
You can’t make informed decisions without accurate information. You need to know your company’s financial status to determine if you can afford purchases, hire additional staff, need additional financing, or how much debt you can incur or pay off.
Get Professional Help to Maintain Accurate Financial Statements
Accurate financial reports can make the difference between making educated decisions and shooting from the hip. They’ll provide the information you need to improve operations, increase income, reduce expenses, and ensure tax compliance.
Orcutt & Company can help you create and maintain accurate financial statements for your business. We can also analyze your financial position and provide guidance on important financial decisions based on the numbers. We’ll analyze trends and make recommendations on making changes to help your business grow and prosper.