Financial statements constitute a major part of any small business owner's business plan They play an essential role in securing investments to grow your company, and financial data will help you understand how money flows to and from your business. leading to smarter decisions about what investments to make, While also referring to different financial statements allows you to obtain material information about the performance of your small business s financial statements ", all of which and other advantages of financial statements, will be identified in this guide for small business owners.
What are the financial statements?
The financial statements provide an official record of the organization's financial activity and current financial situation and an idea of how well it performs in the future, the financial statements can help show business activity and financial performance, which are required for audits and are often used for tax, finance or investment purposes.
Why is the financial statement important?
The financial statements contain all the operating results of small companies, their current financial position and cash flow. The financial statements are therefore important for the following reasons:
- The financial statements create a documented "paper trail" for the company's financial activities.
- The financial statements summarize significant financial accounting information about the company.
- The financial statements provide internal and external stakeholders with an accurate picture of the organization's current financial situation.
Who uses the financial statements?
The financial statements are also used in addition to business owners, used by lenders to determine the level of the entity's risk. The financial statements also contain information that may be required by law and/or accounting standards, and provide accountants with the data they need to be able to complete the company's tax returns, and other required documents.
Better understanding of financial statements
The accountant can write the financial statements and then provide detailed explanations to business managers, so that they can make informed business decisions.
Furthermore, to find out how to read the financial statements, it is necessary to be able to have an idea of the events that occurred during the accounting period, the legal accountant also circulates the accounting terms in order to provide simple interpretations of certain elements of the statements that are difficult to understand.
In addition to producing financial statements, accountants can provide the required certificates:
- Audit Task
- Examination Task
- Pledge your data
Financial Statements Sections
The financial statements are divided into three main elements:
The current balance sheet, the Profit and Loss Statement (P&L), and the Cash Flow Statement, these elements provide a common understanding of profits and a basis for making predictions about the company's financial future. Here is a look at each and the purpose it serves:
- Balance sheet shows assets and liabilities
- Profit and loss statement, or income statement, records the company's revenue and expenses for a certain period
- The cash flow statement shows how much cash the company has and its ability to manage cash, as well as its ability to meet current obligations, pay operating expenses and fund any potential investments.
Each of the three major financial statements of small businesses serves a different purpose individually. The income statement, for example, shows whether the company is making a profit, while the balance sheet reveals the current state of the business as of the date listed in that document (as against the year or quarter in general, as with the income statement), finally, the company's cash receipts and cash payments can be found in its cash flow statement.
Main Financial Statements Characteristics
The most necessary financial statements you should be aware of, to which we have referred are the balance sheet, income statement and annual report, the characteristics of which are:
The balance sheet is the most important in the financial statements, because it collects all the important numbers that you should be aware of in one place, in simple terms, it's a table for everything you own. (called assets) and whatever you owe (called responsibilities), by subtracting these two, you get your net worth as a company at a specific time (or shareholders' rights, if we have to use a fantasy word).
All publicly traded companies must prepare a balance sheet by the Securities and Exchange Commission, in this way, potential customers and investors can obtain a clear picture of their financial situation.
Balance sheet breakdown
As an employer, you need to understand how to read the balance sheet so you can assess your company's well-being at any moment, and the balance sheet is made up of elements that are already familiar to you. It is called:
Includes tangible property such as real estate, machinery and vehicles, as well as intangible property such as patents, copyright and trademarks.
All debts and obligations incurred by the company as a result of its operations, including loans, credits, accrued expenses and mortgages.
This statement is also known as Profit and Loss, and gives you insight into how much cash you enter your company (revenue) and how much you will go to cover its needs (expenses). The result you get when putting up is your income, taking into account, besides the balance sheet, the employer can assess the return they earn from their investments.
Thus, you can understand how your company performs over a specified period of time and how effectively you control your expenses, moreover, the income statement analysis is useful in calculating other financial ratios regardless of profit and loss, such as net profit margin, and much more!
Unlike the balance sheet and income statement, which are clearly structured financial statements, the annual report is a less formal but equal risk document, the company's management prepares the annual report in order to present shareholders with major events that occurred during a one-year period.
The annual report provides insight into each important aspect of the company's growth. It is a financial statement that may include competition analysis, information about industry trends, leadership decisions and effectiveness.
Otherwise, the annual report provides a breakdown of other financial statement numbers and explains their results, for example, if the company suffers losses, this is where management explains why and how these losses occurred. If the company appears profitable, the annual report should provide suggestions on how to maintain profit margins and opportunities for further growth.
Tips and tools for preparing financial statements
You can facilitate the preparation and analysis of financial statements using technology, here are some programs to facilitate financial management:
- Use accounting software to automate accounting processes and avoid errors when creating financial statements.
- Automate simple financial processes, including invoices, receivables and payments to improve your accounting.
- Use financial reporting software to get an overview of financial statements, customize your reports and create informative dashboards using key metrics.
The financial statements consist of three individual components, all of which help internal and external stakeholders make good decisions about the company, and help business owners plan their cycles for the future based on their current and historical financial conditions, resources and contingency plans.