Financial Statements: What Business Owners Should Know
Introduction
Financial statements are the primary tools used by CFOs and accountants to measure a company's financial performance. They can be difficult to understand at first, but understanding how they work is critical for every business owner. Here's what every small-business owner needs to know about financial statements:
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What are financial statements?
Financial statements are a snapshot of your business’s financial health at a particular point in time. They can be used as a management tool to help you make decisions about the future of your company and its performance. Financial statements are an important part of financial reporting, which is the process that businesses go through to ensure they have all their information and data prepared for external users like investors.
Financial statements can be prepared for internal management or external investors, but there are differences between both types:
A balance sheet
A balance sheet is a snapshot of a company’s assets, liabilities, and equity at a point in time. The balance sheet is the first page of the financial statements. The term “balance sheet” originates from accounting practices used by businesses in the 19th century.
The components of a balance sheet are:
Assets – what your business owns; these could be things like buildings or machinery.
Liabilities – what your business owes to others (for example loans).
Equity – the difference between assets and liabilities; this includes money invested in a company by owners (equity) as well as retained earnings or profit that has not been paid out to shareholders yet (also called Retained Earnings).
An income statement
An income statement is commonly referred to as a Profit & Loss. The income statement is a financial statement that provides a summary of a company’s revenue, expenses, and net profit for a period of time. It shows the change in equity during that accounting period.
A company’s income statement is prepared for each accounting period, such as quarterly or annually.
A statement of cash flows
The cash flow statement also provides information about how much money a business has. The statement lists the amount of cash on hand at the beginning, during, and at the end of an accounting period. It also shows how this money was used to generate income for your business.
A key financial document that provides you with detailed information about how much cash you have in your bank accounts is called a statement of cash flows. This statement shows how much money went into and out of your account during a specific time period (usually one year). If you want to use this tool, it's important that you understand what each section represents before preparing it yourself.
Financial statements are both a snapshot of a business and a crucial management tool. It's important to know the basics.
As a business owner, you're probably familiar with financial statements. They are a crucial management tool that helps you understand how your business is doing and what it needs to do to succeed. Financial statements provide the information you need to make decisions, plan for the future, and evaluate performance.
Financial statements are used for several purposes:
To compare companies with each other or against industry averages (industry analysis). You can use financial statements from one company to compare its performance with another company’s or against an industry average over time. This helps you decide which companies deserve further research and investment.
To make forecasts about future performance (forecasting). Financial statement data can be useful when making predictions about how well the company will perform in the future based on past performance patterns such as revenue increases over time or profit margins fluctuating month by month due to seasonal factors like weather conditions affecting sales volume during certain months of the year more than others.
Conclusion
Financial statements are the foundation of any successful business. When you understand how to read and interpret these documents, you can make better decisions that will lead your company toward success. Financial statements are also a great way to benchmark your business against competitors and identify areas where you need improvement
