In terms of record-keeping, there are three must-haves for any successful business. Keeping tabs on all financials is very important for the company’s economic health. This is where business financial statements come into play. You’ll know exactly where you stand, what projections might look like based on past and current models, and what might need adjusting in terms of money coming in vs. what is going out.
The three types of business financial statements you want to keep current are income statements, cash flow statements, and your balance sheets. Let’s discuss each one and explain what their key features are.
Income Statement
It is developed to show a business’s profit and loss over a specified period. An income statement is also known as a profit and loss statement. You include all sales revenue and then deduct your expenses and consequential losses. There are several generic items commonly seen in any income statement. These include revenue, cost of goods sold, gross profit, marketing, advertising expenses, income taxes, and net income.
Generally, a business will need an income statement if they are trying to get a loan from a lender or investor. An income statement provides a concise idea of how much money the company makes.
Cash Flow Statement
A cash flow statement reveals your business liquidity, in other words, what you have on hand for available funds. It lets you know how operations are running, where your money comes from, and how it is spent. The three main components of the cash flow statement are cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.
Cash flow from operating activities is thought to be the most important section. It can be calculated using the direct or indirect method. The direct method involves taking all the cash collections from operating and subtracting all the cash disbursements from operations. The indirect method requires you to take your net income from the income statement and make adjustments to undo the impact of the accruals made during the reporting period.
Both methods will give you the same number but the indirect method is typically faster.
Balance Sheets
You might think of a balance sheet as the big picture of where your company stands financially at any given time. It is typically divided into assets, liabilities, and owner equity.
Assets include:
- Any funds in the business account
- Inventory
- Stocks & bonds
- Accounts receivable
- Long-term investments
- Real estate
- Equipment… among other items
Liabilities involve:
- Accounts payable
- Wages owed to employees
- Taxes
- Loans… and other debts
Equity that belongs to business owners includes:
- Privately-own stocks
- Money invested in the company
- Retained earnings
In the end, the total assets should balance out against liabilities plus owner equity.
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Call today to learn more about our various financing solutions to help your business grow and become successful.