Financial Statements are necessary for every business, big or small, to be successful and thrive. The most common four financial statements that are prepared for a business can give valuable insight into both how the business is performing and what needs to be done to improve.
If you are looking to see where costs can be cut, if it is a suitable time to create a new product, or any other significant business decision, financial statements will help guide you to make the best decision possible for your company.
Financial Statements – The main four and why they are important
Four financial statements are crucial to every business: the income statement, the balance sheet, the statement of cash flows, and the statement of retained earnings.
These four statements alone can paint a vivid picture of how your business is performing and what needs to be done to reach the next goals you’ve set for your company. For these statements to live up to their full potential, you need to understand exactly what each one is supplying you with.
What is the Income Statement?
The income statement is exactly what it sounds like, it shows you your revenue, expenses, and profit/loss during a specific period. This statement is also referred to as a profit and loss (P&L) statement. To put it simply, this statement provides insight into how your company is performing financially over time.
Why the income statement is important
Using the income statement, you can better understand what parts of your business are succeeding and which parts are costing more than they are worth. This information can assist you in making decisions on which products/areas to invest more capital into and which need to be revamped to try to make them more profitable.
The income statement can also be a great tool for forecasting how the business will be in the future. Outsiders, such as investors and lenders, will want to know if your business is making a profit and if it can maintain that profit. The income statement will outline how your business has been performing over time, but if you are looking for a snapshot of your business at a specific point in time, that is provided on the balance sheet.
What is the Balance Sheet?
The balance sheet gives a broader view of your financials, but it is just as important as an income statement. The balance sheet outlines your assets, liabilities, and shareholders’ equity. The mathematical equation that the balance sheet follows is Assets = Liabilities – Shareholders’ Equity.
Why the balance sheet is important
At a glance, the balance sheet captures your financial stance at a given time. This information can tell you if you have the capital to pay your employees, or if you are approaching a tidal wave of debt. It can also give you an idea if a lender or investor would be willing to provide capital to your business. If your liabilities significantly outweigh your assets, attaining capital will prove difficult.
Another way your balance sheet can be used is to assist you in creating a budget. If your company has a solid budget, you can make more realistic plans and sound business decisions.
What is the Statement of Cash Flows?
The statement of cash flows is also self-descriptive. This statement outlines the cash moving in and out of your business. This may sound similar to the income statement; however, the statement of cash flows is more accurate (especially for businesses that utilize accrual accounting).
Why the statement of cash flows is important
Knowing where the cash is coming in and going out of your business is valuable information. You can look at the statement of cash flows over time and better be able to predict cash flow in the future to assist in creating a realistic budget. This statement is also used in conjunction with the income statement to compare the actual amount of cash coming in and the net income of your business. This can let you know if changes need to be made, such as investments or even supplier changes.
Lenders can look at the statement of cash flows and predict whether you have the cash to pay back any funds loaned. They can also determine the liquidity of your business from this statement to be able to make lending decisions.
What is the Statement of Retained Earnings?
Retained earnings are earnings that the business keeps, meaning they are what is left after all dividends are paid out to shareholders. The statement of retained earnings illustrates the changes in the retained earnings over a given period. Ultimately, this statement shows if your profits went up or down over time.
Why the statement of retained earnings is important
While this statement is not prepared as often as the other three financial statements, it is important to track, especially when attempting to gain lenders’ attention. This is because retained funds are partially used for paying back any debt owed. If your business can show that it has been profitable over time, lenders will be more willing to work with you.
The statement of retained earnings also shows you how much money you have to invest back into the business and allows you to show over time how you have used profits to grow your business. This information helps both management with their decision making, and investors decide if your business is a good investment or not.
The ability to make decisions quickly is key
Analyzing your company’s financial statements regularly allows you to make the best decisions possible whenever you need to. It also allows you to make strategic plans to stay up to date with the ever-changing world.
Knowing how much cash you have on hand, the liquidity of your business, and knowing where you are making money or where you are losing are all discovered from your financial statements. Preparing and understanding these four basic financial statements can lead you to running and maintaining a successful business.
Preparing for success with Remote Books Online
Now that you understand the importance of each financial statement and realize the abundance of information you can learn from them, you may be wondering where you will find the time in your busy schedule to prepare them with accuracy. Remote Books Online can provide you with accurate and up-to-date financials, while you focus on running and growing your business.