Ask many entrepreneurs and small business owners to show you their financial statements. What do you think you’ll see? Most likely, they will open a laptop and show you their bookkeeping software. Although tracking financial transactions is critical, spreadsheets aren’t financial statements.
In short, financial statements are detailed and carefully organized reports about the financial activities and overall position of a business. As any company evolves, it will likely encounter an increasing need to properly generate financial statements to build credibility with outside parties. This includes parties such as investors and lenders. In addition to building credibility, financial statements are also needed to make well-informed strategic decisions.
These are the typical components of financial statements:
Also known as a profit and loss statement, the income statement shows revenues and expenses for a specified period. To help show which parts of the business are profitable (or not), it should carefully match revenues and expenses.
This provides a snapshot of a company’s assets and liabilities. Assets are items of value, such as cash, accounts receivable, equipment and intellectual property. Liabilities are debts, such as accounts payable, payroll and lines of credit. The balance sheet also states the company’s net worth, which is calculated by subtracting total liabilities from total assets.
This shows how much cash a company generates for a particular period, which is a good indicator of how easily it can pay its bills. The statement details the net increase or decrease in cash as a result of operations, investment activities (such as property or equipment sales or purchases) and financing activities (such as taking out or repaying a loan).
Not always included, this statement shows how much a company’s net worth grew during a specified period. If the business is a corporation, the statement details what percentage of profits for that period the company distributed as dividends to its shareholders and what percentage it retained internally.
Many if not most financial statements contain a supplementary report to provide additional details about the other sections. Some of these notes may take the form of disclosures that are required under Generally Accepted Accounting Principles — the most widely used set of accounting rules and standards. Others might include supporting calculations or written clarifications.
Financial statements tell the ongoing narrative of your company’s finances and profitability. Without them, you really can’t tell anyone, including yourself, precisely how well you’re doing. As a company that specializes in small business accounting, we can help you generate these reports to the highest standards and then use them to your best advantage.