As a business owner, you need to understand your company’s finances, profits, losses, expenditures, and overall net worth. These numbers will provide you with the insight needed to forecast future opportunities and identify potential pitfalls. Managing your finances goes beyond saying, and it’s crucial for determining whether you are facing significant profits or major downfalls in the given season.
The combination of all the financial aspects, business profitability, and its performance is referred to as a financial statement. The three most common types of financial statements used by most domestic businesses and public companies are the balance sheet, cash flow statements, and income statements. You should understand what these statements mean while handling your business. If you are confused, you may consult professional accountants like CPA in Louisville KY who can assist you.
What’s a Financial Statement, and Why Is It So Important?
Financial statements are detailed reports that contain essential information about financial events, transactions, and the company’s economic performance over time. These statements come in different types and are drafted during the process of financial reporting, which helps business owners assess the financial health of a company. Depending on the structure and model of the company, the business owner can use cash flow statements, balance sheets, statements of retained earnings, or profit-loss statements.
Financial statements hold a paramount position as they help lenders, venture capitalists, stakeholders, company partners, and even banks determine key numbers, earning capacity, potential cash flows, accounting policies, economic resources, liabilities, and management status of your business. This implies that if you want to take out a loan or seek investments, insurance companies, investors, and banks may ask you to showcase your financial statements to get a better idea of whether your organization is profitable or worthy of investment.
Companies with public stakes are required to publish their financial statements at the end of the year.
Moreover, financial statements alone help business owners make wise bottom-line decisions, such as cutting bonuses, eliminating additional expenses, considering layoffs during a loss season, opting for expansion, entering international markets, and hiring more staff. It all depends on your current economic worth and your understanding of your balances, taxation, and company accounts.
Balance Sheet
A balance sheet is a type of financial statement that records the company’s assets, liabilities, and equity at a particular time. It provides the working capital ratio and other balancing equations that help business owners understand where they stand in terms of money.
The balance sheet highlights three pillars of the company:
- Assets: These reflect a company’s resources that generate sales, profits, and revenue. They may be tangible, like property and equipment, or intangible, like patents.
- Liabilities: These are the debts that a business owes to another person or party, including current payable accounts and loans.
- Equity: If you subtract the total liabilities of a company from its total assets, you get the true value of that business, known as equity.
Income Statement
An income statement lists information about expenses and revenue for a given period. It also tracks returns on investments, risks, administrative operations, and financial flexibility. Most companies in Kentucky prefer to use multi-step income statements, where the gross profit and operational costs for the generated profit are also documented. For example, a large corporation that produces a multi-step income statement will typically include inputs on sales generated, cost of goods sold, net profits, and operating expenditures while preparing its financial statement.
Cash Flow Statement
The cash flow statement accounts for the company’s cash inflows and outflows, evaluated through bookkeeping operating business activities, current investments, and other financial activities. You may need historical and ongoing account data to prepare cash flow statements.
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