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.
Your investors and creditors will want to look at your financial statements, including balance sheet, income statement, cash flow statement, and statement of owner’s equity, to help you reach your financing goals. As a small business owner, it’s essential to understand these four types of financial statements and the wealth of information they reveal to you and potential investors and creditors.
1. Balance Sheet
Also 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 a snapshot of your 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.
2. Income Statement
The income statement provides users with a picture of your business’s financial performance over a specified period. Sometimes 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.
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 can consult with you and advise on using the information to your advantage.
3. Cash Flow Statement
The cash flow statement (or a statement of changes in financial position) gives you an understanding of how well your 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.
4. Statement of Retained Earnings
The owner’s equity or retained earnings statement details your business’ included earnings at the end of a financial period. It shows the profit maintained within the company rather than distributed to shareholders and owners at the beginning and the end of a specified reporting period.
Typically, retained earnings are used to either reinvest in the business or to pay off debt obligations. It provides information regarding the financial health of your business, as it indicates whether your business can meet ongoing financial and operating obligations without requiring its shareholders or owners to contribute extra capital.
Preparing for Business Success with Financial Statements
By preparing these four financial statements, you will be able to provide prospective investors or creditors with the critical information they need to assess your business and make an informed decision. They also help you identify trends in your company’s performance to help position your business for continued success. Always work with an experienced accounting professional to help ensure that your company is compliant with financial reporting and obligations throughout the year.