For those unaware, financial reports are meant to help people understand how a business is doing and, in the case of a business owner, help them make informed decisions on what to do next. Whether you're a sole proprietor or corporation, there are three financial reports essential for your continuing operations and every business owner should know how to make and review them. So, let’s talk about the Balance Sheet, Income Statement, and Statement of Cash Flows.
The Balance Sheet
The first essential report is the Balance Sheet. The balance sheet shows all of your business' assets, which are the resources owned by the business, as divided between liabilities and equity. It is also known as a Statement of Financial Position because it shows to investors and others who view it just how many assets the company has, how much it owns through its owner and profits, as well as how much it owes for creditors.
Most balance sheets are arranged so that they reflect the accounting equation. That means the total number of assets will be the sum of the liabilities and equity. The information it provides helps both internal users, such as the business owner, and external users, such as investors, understand in a quick glance whether or not the business is supported by loans and credit or profits and earnings.
The Income Statement
The second report is the Income Statement. It is also known as the Profit and Loss Statement, because this report summarizes just how much of a profit your business makes in a set time period. As businesses are normally formed in order to make a profit, it is crucial to both internal and external users in tracking the business’ performance in regards to sales and revenue.
A proper income statement won’t stop at just informing you whether or not you made a profit, but also the costs and expenses that accumulated in the process of generating revenue. For a business owner, this is often the deciding factor on whether or not products or services will need to be changed to increase profitability. After all, there’s no point in selling a million dollars’ worth of inventory in a single day if the expenses to do so cost just as much in the first place.
The Statement of Cash Flows
The last report is the Statement of Cash Flows, which measures just how the money in your business is being used. You see, cash is the lifeblood of a business and you need a certain amount to keep it alive. You can make all the profit in the world, but if you don’t have enough cash to pay your bills on-time because you put too much of it in inventory, or haven’t collected on your accounts receivable, you’ll be shutting your doors pretty soon.
The statement of cash flows includes cash or its equivalents that have been gained or used in regards to investing activities, financing activities, and operating activities. For both external and internal users, it can help determine how well the business is managing its cash, and it should never be neglected. Also, a final thing to remember is that cash is not net income or profit, as those are only centered around a part of operating activities, which also includes things that are done on credit.
Reviewing these three financial reports monthly (at the very least) is essential for managing your business and moving your books from being in the red to being in the black. So, naturally, don't hesitate to Contact Us if you need help drafting up these reports. We'll be more than happy to give you a helping hand or do it for you.
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