What Business Owners Need To Know About Financial Statements

Financial statements are increasingly important for showing stakeholders the specifics about your company that help them assess its viability. However, you may have only heard about them in passing and aren’t sure how they specifically relate to your enterprise. If so, don’t worry. It’s easy to grasp the basics of these documents. The first thing you need to know is that financial statements are written documents that detail your company’s monetary-related performance. 

Which Parties Will Look at Financial Statements?

Financial statements give a detailed picture of a company’s earnings potential and financial health. Thus, the main entities that will refer to financial statements are creditors, market analysts, and investors. Those parties have a vested interest in understanding the current financial status of your business and how it will likely perform in the future. 

Your financial statements may also undergo audits from accountants, government representatives, or other parties tasked with verifying the accuracy of the material. That means that anyone who needs to create these documents must do so with care to ensure the best outcomes and avoid preventable complications. 

What Is the First Step for Creating Financial Statements?

Generating thorough and accurate financial statements starts by having complete and up-to-date records. Thus, you’ll begin by organizing and compiling information that you already have about the company.

On the other hand, if you know that your internal data is not reliable, start by getting the records in order first. You don’t want to waste time by working with information that does not accurately reflect the company. An accountant could help identify the gaps in your company’s recordkeeping and have advice for getting you back on the right track.

What Are the Main Parts of Financial Statements?

Financial statements have three main parts, each with pertinent information within. They include the cash flow statement, the income statement, and the balance sheet. Let’s go over some of the fundamentals of these segments. 

The cash flow statement (CFS) tells people about the origins of a company’s money and how the business spends it. It reveals how well the entity generates cash to pay its debts. First, the CFS includes a section about operating activities, containing details of how the company receives and uses its cash for running the business and selling things. 

The second part of the CFS relates to investing activities that connect to the company’s long-term future. For example, if the business owner purchases a new manufacturing plant or equipment for that facility, such data goes into this section of the CFS. 

Then, the last part of the CFS gives people information about financing activities. It could detail financial resources provided by banks or investors, debt repayments, and equity issuance. 

Concerning the income statement, it clarifies the differences between a company’s profits and losses over a given reporting period. That’s why some people call the income statement a profit and losses statement. The income statement also includes the company’s total revenue and total expenses. 

The total revenue is the sum of operating and non-operating revenues. Then, your total expenses recorded in this section should include those related to primary and secondary business activities. You’ll calculate your net income by subtracting total expenses from total revenue. 

The balance sheet is the final piece of a complete financial statement. It gives a glimpse of your company’s status at a moment in time. That’s because it breaks down everything you own versus everything you owe as of the day that you generate the balance sheet. Format the page by listing your assets on the left and your liabilities on the right. That arrangement helps readers contrast the two columns. 

How Can an Auditor Give Peace of Mind About Your Financial Statements?

Many widely available software titles have built-in features that help people create financial statements. However, it’s understandable if you would want a professional to check your financial statement before an outside party reads it. An auditor can review the included documents and ensure you have prepared them in accordance with your country’s regulations. 

Reputable auditors will also speak to people within your company to ensure they have an accurate understanding of your business. Moreover, if they notice any aspects of the financial statement that they believe should be changed for legal reasons, they’ll communicate with you about those specifics. Such information gives you the opportunity to take corrective action. 

Financial statements help people form impressions about your business. Having an auditor review those documents before you distribute them to others can prevent you from making mistakes that could temporarily damage how people view your company or make it more difficult to gain positive attention from investors or other stakeholders. 

Why Does Having an Accurate Financial Statement Help Your Business?

Making a financial statement may seem like a daunting task, and, indeed, it is not something you should expect to create in an hour or two. However, it’s a worthwhile endeavor for positioning your business to succeed. For example, having a well-compiled financial statement could make the difference between getting awarded a loan and receiving word that you got turned down. 

Use the information here as an excellent starting point. Then, recognize when it may be the right time to get additional help from an auditor or other financial professional.