The ability to understand the company's financial situation is one of the most important skills for the development of ambitious investors, entrepreneurs and managers By arming investors with this knowledge, they can better identify promising opportunities while avoiding unjustified risks and professionals at all levels can make more strategic business decisions, This highlights the role of financial statements as a window into a company's financial health. What are the financial statements and types?, Read on.
Concept of financial statements
Financial lists are a set of documents that demonstrate your company's financial position at a specific time, and include basic data about what your company owes, what you owe, how much money you made and how much you spend.
Financial statements may be prepared for different time frames, annual financial statements cover the company's last financial year, companies can also prepare interim financial statements on a monthly, quarterly or biannual basis, and interim statements sometimes contain fewer components than end-of-year statements, for example, they may lack a cash flow statement and a withheld profit statement.
Why are financial statements important?
Analyzing financial lists is critical to your business success. Here are some benefits of doing so:
Financial Health Assessment
By analyzing your business financial lists, you can clearly understand your company's financial situation, as you can see where your business stands financially, whether it's making a profit, a tie, or a loss.
Understanding financial listings allows you to make informed decisions about your business, where you can use this information to identify areas where you can cut costs, where you can invest more, and make decisions about expansion.
Planning and Budget
Financial lists help you plan and budget for the future, and you can use information to predict future revenues, identify areas where you need to increase sales or reduce costs, and develop a strategy to achieve your financial goals.
Types of financial lists you need to know
There are many important financial listing documents that each business needs, here are the financial lists you need to know:
1. Income Statement
Arguably the most important income statement in financial statements business needs to monitor profits and money flowing closely, And that's exactly what the income statement does, the income statement may also be known as the profit and loss statement, Which shows your income and business expenses over a specified period Income statement takes revenue, losses and expenses into account, so that it can show whether your company made a profit or missed its mark.
Some of the information contained in the income statement includes:
Revenue: The amount of money the company makes and differs from profit.
Expenditure: Expenditure is the amount of money paid by the company, for example, the purchase of office equipment, wages and utilities.
Cost of goods sold (COGS): Companies accumulate expenses for the production of their goods, referred to as COGS, examples include the cost of raw materials, the average cost of advertising, and the cost of sales strength.
Depreciation: This indicates the low value of tangible assets, such as machinery owned by the company, any piece of equipment eroded over time by use.
Gross profit: gross profit is total revenue after subtracting the cost of goods sold, it shows the true financial health of the company.
Net income: This is the amount that the company already makes after tax, costs and other allowances.
2. Cash flow statement
The cash flow statement shows how money enters and leaves your business, so you can see what is available to you as working capital at a given time, A cash flow statement is necessary to show how quickly you can get cash if you need it Because it does not take into account things like raw materials or purchases made - but not yet paid for - on credit.
Cash flow statement consists of three parts:
Cash flow from operating activities: This is cash flow in and out of cash where the company carries out operational activities such as manufacturing and distributing goods and services, by reading the cash flow statement, you can make informed financial decisions.
Cash flow from investment activities: cash flow in and out of cash where the company sells or purchases assets such as real estate, equipment and intellectual property.
Cash flow from financing activities: This is cash flow in and out of cash where the company finances debts, loans and equity, which may be positive or negative.
3. Balance Sheet
Balance Sheet presents three key things: your assets, liabilities and property rights, the balance sheet can show the present value of a business for the period you cover, and seeing your balance sheet can help you understand whether you can meet your financial obligations.
The balance sheet presents the details that determine the return on investment and the prevalence of debt and property rights, the formulas for the implementation of this accounting formula are:
assets = liabilities + owners' rights.
Liabilities = Assets + Equity
Equity = Assets - Obligations
4. Note to the financial statements
This is one of the requirements of IFRS (International Financial Reporting Standards) and gives greater context about the information contained in your other financial listing documents. For example, your assets may be listed on the balance sheet, but the note to the financial listing document is where you will accurately explain what those assets are, and the information contained in this document is required to ensure your compliance with standards and regulations.
5. Statement of Change in Property Rights
This document shows changes made to your company's capital, retained profits, accumulated reserves, and for the sole trader, it shows changes in equity, and for the partnership, it shows changes between the equity rights of both partners, in the company's case, the statement of change in equity shows how the equity share of all shareholders has changed.
Financial lists, whether individually or collectively, provide a potential investor or creditor with a wealth of information, and can have a serious impact on your business ability to access the funds or funding it needs. It is important that a small employer understands these four types of financial statements and information you provide to an investor or creditor interested in providing funds for your business.