When it comes to your business, financial statements are essential. They’re the ultimate indicator of your company’s health and reveal whether or not you’re making a profit. Here’s everything you need to know about basics of types financial statements and how they support you to get idea of the financial position of your business.
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Types of Financial Statements
Balance Sheet
A balance sheet is a snapshot of your business’s financial health at a specific point in time. It lists the company’s assets, liabilities and equity. The balance sheet is a statement of your company’s financial position.
A balance sheet demonstrates how well a company is doing by analyzing the information below:
- How liquid the company is in the short run (less than one year)
- Debt in relation to equity
- Tangible and financial assets’ mix
- The length of time it takes vendors to settle accounts receivable
- The amount of stock the business keeps on hand
Income Statement
The Income Statement is a statement that shows the company’s revenue, expenses and profit for a specific period of time.
For example, you may want to show your financial performance for a specific year, quarter or month. Or perhaps you just want to see how much revenue and profit your business made in the past month!
The income statement tracks the performance of your business over time as well as compare with the competitors. An analysis of this information will help you better understand how much money your business has made throughout a period of time, which may help you make decisions about what direction to take next.
Cash Flow Statement
A cash flow statement is the most important financial statement for small and medium-sized enterprises (SMEs). It provides a clear picture of your business’s cash inflows and outflows over a specific period. The benefit of creating a cash flow statement is, it identifies areas which generate more profit. Also where the business may be losing money.
A cash flow statement should be prepared at least once per year. However, it can be prepared quarterly or monthly based on your business’ operating cycle.
Statement of Owner’s Equity
The Statement of Owner’s Equity is a statement that shows equity of each individual shareholder of the company. It also, shows the retained earning during the period which are being transferred to the owners account. Further, it shows the drawings which owners withdrew from the business and has liability to pay back to business.
Owner’s Equity = Assets – Liabilities
A Statement of Owner’s Equity provides a financial snapshot, and is a good tool to compare assets and liabilities against owner’s equity.
The statement also helps you understand how much money each owner has contributed to the business. This information can help you better understand which owners have invested more than others, which will give you an idea about their interest in continuing with the business.
How types of Financial Statements Differentiate
The financial statements are a key part of your business. They help you understand the status of your business and how it is performing.
- Balance Sheet: It summarizes all assets owned by a company at any point in time (including current assets such as accounts receivable) along with liabilities owed to creditors (current liabilities), shareholders (long term debts) or employees etc., which gives an indication about their financial strength over time.
- Income Statement: It shows revenue earned from sales & services during a given period along with expenses incurred during that period so that you can assess whether there has been any profit made from selling goods/services.
- Cash Flow Statement: This shows how much cash was generated during the period and what was spent on operating expenses, capital expenditure, investments or other purposes.
- Statement of Owner’s Equity: The owner’s equity is defined as the amount of money a company has at its disposal (e.g., cash, accounts receivable, inventory, etc.). The statement of owner’s equity shows the total assets less liabilities and divided by the owner’s equity in the company.
The balance sheet will also give us some idea about how much profit could be made if we were still selling these things right now but instead investing them somewhere else like building new factories etc., because most likely it would result in higher profits than what we currently get!
Financial statements and their components are the backbone to your business. They’re the key to helping you make objective, informed decisions regarding the performance of your company. If all of your hard work doesn’t seem to be paying off, take a closer look at those numbers—they’ll give you some valuable insight.
Conclusion
Now you know what financial statements are and how to read them. You may also want to explore our other articles on financial statements that cover more in-depth topics such as how they’re created, what they show us about our business, and how we can use them for planning purposes.
Financial statements offer a great reflection of where your business stands. While you’re examining each statement thoroughly, it’s generally a good idea to make sure your revenue is on the rise, and your expenses are at a minimum. If that’s the case, you can feel confident that your business is doing well and that you’re following in the footsteps of successful small businesses everywhere.
Whether your company is new, or it’s been around for a while, you can’t do without proper financial records. No matter how big or small your business is, it’s important to keep accurate financial statements. We recommend starting gradually by recording your basic income and expenditure, for beginning of the month, and at month end. Once you have an understanding on how cash flows through your business, add other factors such as payroll or tax.