A successful business owner must monitor the financial condition of his or her company. This is essential to ensuring that the business is running as effectively as possible and to prevent any potential problems that could arise. Financial statements are tools that help you evaluate your business. The reports each provide information on a company’s business activities, financial position, and performance over a specific period of time. These three financial statements are key components of a small business’s annual reports, which can help management and investors make decisions about the future of the company.
1. Income statement
The income statement helps tell how profitable the company was during a given period. It also provides details like sales, gross profit, and net profits (profit after expenses). To put it in simple terms, a great income statement shows if your business is gaining or losing money every month. Furthermore, every business has an associated income statement that shows its financial performance during specific time periods. The income statement is one of the most important financial statements to understand. By knowing your company's actual sales, along with its expenses, notes, and other costs, you will be able to see where your money is going.
2. Balance sheet
The balance sheet for a business is a snapshot of its financial strengths, weaknesses, and assets, and liabilities. The current assets section includes inventories and cash on hand, while long-term assets include inventory and bank deposits while liabilities are payment obligations that extend beyond the current year or operating cycle.
In addition to recording accounts receivable and inventory, this financial statement includes notes on any loans, bonds, or other obligations due within a year. The balance sheet also details any assets that are expected to remain unchanged for more than a year, such as plant and equipment. This report tallies the company’s assets, liabilities, and net worth to create a snapshot of its financial health. Current assets (such as accounts receivable or inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.
3. Cash flow statement
A cash flow statement is a valuable asset to any business. It functions as a major benchmark of the health of your firm and its finances. Although it shows the same information as an income statement, it focuses solely on cash. Cash flows are divided into different groups: operating, investing and financing activities. The bottom line shows how much cash came in (or out) during the period cited.
The cash flow statement is a critical financial report that every business owner should be familiar with. It shows the financial health of your business. The cash you receive flows in, and the cash you spend flows out. This report can reveal whether your company is growing at a healthy rate, or if your operations are completely lacking. In addition, it will show you how much money a particular area of your business makes.
Ratios and trends
As we know, ratios are a tool used to analyze a company’s financial position. And when it comes to analyzing the global economy, ratios play a key role in determining where we stand and how our economy is doing. This is because ratios provide us with a benchmark for comparison purposes — allowing us to get a better understanding of where we might be heading in the future.
Are you keeping an eye on the trends and ratios in your financial statements? Business owners and managers who regularly monitor these three crucial reports have a better chance of spotting potential issues before they spiral out of control and making the necessary adjustments to increase the value of the business.
One of the most common reasons businesses fail is because they fail to keep up with their numbers. That's especially true when it comes to financial reporting and tracking. All too often, business owners and managers view reports as numbers on a page that are similar to a chart in algebra class. And frankly, that's not always bad — a good understanding of basic finance is useful no matter what kind of business you're in.
Looking for a professional to help you with your business? Schedule a free consultation with us now. At ACTvisory we have a friendly and approachable team of accountants, who will handle the reports so you can focus on running your business. With regularly scheduled meetings we will guide you on understanding how your business is financially.
