Financial statements are essential indicators whether the business is running successfully. These are essentially the results of your business operations translated into numbers. These numbers can be then used for internal and external review of the viability of the business, where money is going and what is coming in.
Types of Financial Statements
There are three types of financial statements. The first is the balance sheet, which basically shows where the money is in the business, its assets, and liabilities, as well as its net worth on a specified date. If you are providing this information to someone to determine if the business is healthy, then you want to have the most recent specified date possible (and with an amazing bookkeeper, the most recent date would be just yesterday).
Another useful financial statement is the income statement. Some may know this as a profit and loss statement. Why is this important? Well, all the concerned parties need to know what is coming in and what is going out. This statement should ideally be in the positive. The company wants to see more profit than a loss in the business. If that is not the case, then business changes are necessary.
The last very useful financial statement is the cash flow statement which shows where the money is coming from and what activities the money is being spent on. Maybe the business owner took its employees out for a company dinner to strengthen employee morale and appreciate their hard work. Or funds are being used to run business meetings and for business travel. All such information is very relevant and important to the outside parties who need to have a clear financial picture of business’ health and stability and informs potential investors whether their money is safe and well taken care of. That’s why the most recent financial statements can help that those looking at these statements understand company’s financial standing to make an informed financial decision and assess any risk associated with the investment.
Purpose of Financial Statements
Financial statements are important for any business.They are the backbone in determining if the company is financially healthy and if there are any changes requiring to be made. For example, if you are a small business looking to expand, you’ll need to look at your books and the financial statements to see if there is enough profit to justify expansion, or how a business expansion would affect your profits. Often going for an expansion means potentially requiring taking on further loans, whether it is to increase the production space or rent a more suitable one that requires moving. Can you afford to hire more people? These are all questions that well prepared financial statements can help you to answer.
Financial statements can help you make more informed investment decisions. If you are an investor in a company, the financial statements can help paint the picture of where the stocks are and whether their value is increasing or decreasing. Understanding how is the shareholders’ equity allocated and how their investments in the company are doing often suffice to know whether the potential investment is a good one.
The financial statements are not just internal documents. They are can be viewed by the general public, enabling potential partners and investors to determine the viability of the company and its ability to grow or potential risks that can indicate company’s fold. Had you have an ability to review the books of a company that recently went bankrupt, you would most likely see a decline in the black fields and increase in the red ones. That’s not what as a business owner you would want to see; and unless there is a hot market for that type of company, investors would be also very reluctant investing into a business like that either. It’s important to have a good bookkeeper and review your financial statements regularly to make timely adjustments to keep the business growth. That is the main purpose of financial statements; to help you see the whole picture and to improve the health of your company.