In all businesses, it is vital to know where your business stands at any point in time. Understanding the financial health of your business will be the key to making smart and informed decisions to ensure your business stays on the right track to success.
In this blog, we will dive into the most important financial statements and how they can help you understand your business.
There are certain reports you should have access to or be created to help you see the complete picture of your business. The top financial reports you should review are the balance sheet, income statement, statement of cash flows and the statement of stockholders’ equity
The first one we will look at is the income statement. You may have heard it called by that name or by a few others, such as the statement of income or the revenue statement, but they all mean the same thing. The income statement is the report that details your company’s business financial performance through a certain period of time.
Income statements focus on the four major elements in this financial report which are revenue, gains, expenses and losses. The revenue is the amount of money the company actually receives for that period of time. Gains will include the increase in the value of any assets the organization may hold. Expenses are the costs that your business will incur as a result of conducting business, and the losses occur when you lose money or a decrease in its financial value.
Income statements are so important to a business because they will show how efficiently an organization is managing its finances as well as highlighting any underperforming areas that could be improved upon.
The balance sheet is the financial statement that shows the company’s assets, liabilities, and shareholders’ equity. It is a snapshot in time that spells out what is owed and what is owed as of a specific date. By using the balance in addition to other financial statements, you will be able to calculate certain ratios.
On the balance sheet, there are three main elements to the report: assets, liabilities, and the shareholders’ equity. Assets are any cash holdings, inventory, and property held by the business. Liabilities are what a company owes to outside parties, such as bills and salaries. Liabilities can be broken into short term and long term, with the only difference being that long term liabilities are due at any point after one year. The shareholders’ equity or the net assets are retained earnings, kept for the company, and not paid out to shareholders.
The balance sheet is vital to a business because when compared to previous time period balance sheets, it can give a good indication of trends. Still, to have optimal impact, it is best used in conjunction with the other types of financial statements to provide a complete picture of the business.
The statement of cash flows or the cash flow statement is the report that details all the inflows and outflows of cash. It includes the money made by the business through its operations, investments, and financing activities. This statement is vital because it will give critical insights into all the financial transactions that the business completes.
Cash flow from operations will show all the operational business activities, such as buying and selling inventory or paying employees salaries. Cash flows from investing activities will include the direct results of gains and losses from investing. That can consist of capital expenditures. The cash flows from the financing will show the money used from debt and equity, which is the money between the owners and the creditors.
The cash flow from investing will go over the gains and losses from any investments your business has made. This will also include any cash spent on equipment, plant, property, and this is where your capital expenditures will reside. For those looking to introduce investors to your company, you will want to generate your cash flow through your business operation and not solely through investing and financing.
Lastly, the cash flow from financing involves looking at the cash used in financing. It follows the cash flow from the business to creditors, the company, and the owners. This type of information will be reported on the 10-K report to all shareholders. This information will report on the amount of money that has been paid out via dividends and any share buy-backs that have occurred during that period.
All equity and debts are documented in this report as well. If the cash flow is positive, then the company is receiving more inflows of money, but if the number is negative, then it could mean that the company is paying back loans or making dividend payments.
The statement of Stockholders’ Equity is also known as the shareholders’ equity and talks about the owner’s claim on any assets after the liabilities have been paid. The calculation to determine this amount is total assets minus total liabilities. If this number is positive, then it means that the company has enough assets to cover the liabilities. If the number is negative, then there are too many liabilities.
Retained earnings are also an essential element of the stockholders’ equity. This is the percentage of net earnings that are not paid to any shareholders via dividends. The retained earnings can either be positive or negative. It’s best practice not to carry a negative balance in the retained earnings section because this can be an indicator of business bankruptcy, so this should be monitored often.
Final Thoughts on Financial Statements
Financial statements are precious assets to a business owner. It can relay the stability and health of any organization. These statements can also be used as a tool to help chart a course for the success of your business. It is critical that the reports are accurate and that you, as a business owner and entrepreneur, understand what they are telling you about the various aspects of your business.
You don’t have to struggle to understand or even create the financial statements because we at Accolade Accounting will do the heavy lifting for you. We will gladly interpret the findings of your business reports in an easy-to-understand and actionable way to help you make informed decisions. We are here to help you succeed!
Until next time my friends,
Cheers!
JD Longino, CPA
