A financial statement is a useful way to examine the financial standing of a company. It easily allows small business owners a transparent view of the health of their business and its trajectory.
There are several financial statements that you can use to get the most benefits. Here’s what you should know about small business financial statements.
What Are Financial Statements?
Financial statements are records that your company keeps to determine the financial status of a company. These statements serve several purposes that can help you in the present and the future.
You’ll use financial statements for several reasons, from investing and lending to seeing how your company grows in a given period.
Financial Statement Purpose and Types
There are three financial statement types:
- Balance sheets
- Cash flow statements
- Income statement
Balance sheets provide a summary of your company’s assets, liabilities, and shareholder equity at a certain point in time.
On a balance sheet, you’ll write assets on the left of a page or document and liabilities in the middle. Assets (what your company owns) must equal your liabilities (what you owe) plus your shareholder equity.
Cash flow statements are the second financial statement. By using a cash flow statement, you’ll be able to determine where your company receives and spends money.
Cash flow statements consist of three sections: operating activities (written first), investing activities (written below the operating activities section), and financing activities (written below the investing activities section).
Each section of the cash flow statement contains sub-sections. This will allow you to focus on more specific ways your company invests, saves, and spends money.
Finally, the income statement focuses on your business expenses and revenue. You’ll use the income statement to see how much your company has remaining to determine your net income.
To form your income statement, you’ll first list your revenue. Under the revenue section, you’ll list expenses. To determine your total expenses, consider costs from several sources, such as:
- Lease payments
- Office expenses
- Payroll
- Utilities
Depending on the size of your company, you’ll add more categories as needed. Next, you’ll add the expenses. Third, you’ll determine your earnings before interest and taxes.
Finally, you’ll deduct your expenses from interest and the amount of taxes. After listing your taxes paid, you’ll have your company’s net income.
Importance of Small Business Financial Statements
Small business financial statements are important for a few reasons. First, financial statements are beneficial for potential investment opportunities.
Investors are more likely to look at your financial statements to decide whether your business is a worthwhile investment. This also applies if you are seeking loans for lenders.
Second, if your small business receives an audit from accountants or government agencies, you’ll need accurate financial statements to avoid penalties.
Finally, you can use each of the financial statements independent of each other and with each other to further analyze how your small business is doing.
A Bookkeeper Can Help With Your Financial Statements
Financial statements are an essential tool to keep your business running smoothly. However, if you’re just getting started with your business or are preparing them for the first time, it’s a good idea to consult an experienced bookkeeper who can guide you through the process and answer any questions you might have.
