In terms of record-keeping, there are three must-haves for any business. Keeping tabs on all financials is pretty important for the economic health of the company. You want to know exactly where you stand, what projections might look like based upon past and current models, and what might need some adjusting in terms of money coming in versus what is going out. This is where business financial statements most definitely come into play. And the three types business financial statements you want to keep current are Income Statement, Cash Flow Statement, and the Balance Sheet. This guide will walk you through each and explain what the key features are.
1.The Income Statement
The first type of business financial statements is the income statement. So what exactly constitutes a company’s income statement? An income statement is developed to show a business’s profitability over a certain specified period. To do this, on the income statement you will include all sales revenue and then proceed to deduct from that all of your expenses and consequent losses.
Most generally, a business will need one of these if they are trying to get a loan from a lender or investor, as the person loaning the money will want a fairly concise idea of how much money the company is making. Internally, this might also be called a profit and loss statement.
At the top of your income statement, you will show all sales revenue for a given period. You will then subtract from this number cost of goods sold (COGS). This number is comprised of expenses directly tied to producing and selling your product, so for instance, raw materials, inventory, labor, and so forth. The resulting number—once you take COGS out of your revenue—is the gross profit. This will show a lender about how profitable the business is.
Now, of course, there are other costs associated with any business. Such is related to overhead. These are usually referred to as operating expenses and include things such as rent, utilities, and marketing costs. Anything essentially required to run your business but that isn’t necessarily tied to the actual products being sold. Such expenses also appear on your balance sheet and once deducted from the gross profit will show your operating earnings or what is also called operating profit.
This however is not the final piece to the income statement. You also need to account for any outstanding loans/debts you have—you will then deduct the interest paid monthly for any such money owed. Also, keep in mind you will have to subtract income tax paid to the government. And once you’ve taken those expenses out, that is when you are left with your total net profit…or, the bottom line.
2. Cash Flow Statement
This essentially lets you know how much is coming in and going out of the company over some time. There are a couple of different ways to record cash flow. Some opt to use accrual-based accounting; this involves recording income and your expenses when incurred—in other words, the cash may not have come in or consequently have left the account yet, but the transaction has occurred. There is also the cash accounting method, money is only accounted for when it is in hand or by the same token, leaves.
The cash flow statement is critical for several reasons. Businesses can only operate for so long with negative cash flow. Ultimately, this will cripple operations and you may be forced to take some drastic measures. However, by keeping tabs on cash flow with a cash flow statement you gain a clearer picture of where things stand and can make adjustments when needed—before you get in too deep.
A cash flow statement shows your liquidity–so what you have on hand as far as available funds. This is key, as let’s say you need to make some purchases for the business, if the cash on hand is not there, and you can see this because of an up to date cash flow statement, then odds are, you’re going to hold off on making any such purchases for a bit.
Many businesses also use cash flow statements to predict future cash flow. This will also be useful if applying for any type of business loan financing. A lender is going to want to see a cash flow statement to ensure that in the upcoming months you will be able to make payments on any type of commercial funding.
3. Balance Sheet
The third type of business financial statements that most businesses have is a balance sheet. What exactly is this? You might think of a balance sheet as the big picture of where your company stands financially at any given time. So, since the business’s inception, you will keep track of all transactions. It will show assets, liabilities, and owner equity. When applying for any sort of financing, the lender or investor will usually require a balance sheet because it does offer such a comprehensive view of a company’s financials.
Most companies will prepare a balance sheet either at the end of the quarter or at year’s end. This particular financial statement is extremely important as at a glance it can offer invaluable information such as how much debt you’ve accrued to date, how many assets the business has, and where your current liability versus assets stands. Additionally, in comparing one year’s balance sheet with that of the previous year, you do gain insight in terms of how your overall financial picture has changed and what that might mean moving forward.
The balance sheet is typically divided into liabilities, assets, and owner equity. Assets will include any money in the business account, inventory, stocks and bonds, accounts receivable, long term investments, real estate, equipment, among other items. Liabilities generally involve accounts payable, wages owed to employees, taxes, loans, and other such debts. And finally, the equity is that which belongs to the business owners; this might include, private stock owned, money they’ve invested in the company as well as retained earnings. In the end, the total assets should balance out against liabilities plus owner equity. Again, this presents a snapshot of your company’s financial health and is often used in determining financing eligibility.
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