Running a business is not about just buying/manufacturing products and selling them to make a profit. That is just the basic. There are many things to do and to acquire knowledge about to ensure business success like marketing, accounting, etc. But as you are reading this article, I can feel a sense of urgency and responsibility from you. Now that’s a good quality for a business owner. In this topic, we’ll get an overview of financial statements. We’ll define what is it, its contents, and its importance to a business.
What is a Financial Statement?
From the word itself, financial statement is about the money. It’s a collection of reports on a summary-level about your business’ financial position, financial results, and cash flows. Basically, it tackles everything about your company’s financial aspects. It’s like the scorecard of your business.
Now, to understand it further, let’s check what makes a financial statement. Its standard contents are:
- Balance Sheet – shows detailed information about a company’s assets (things that a company owns that has value), liabilities (amounts of money that a company owes and monetary obligations to others), and shareholder’s equity (capital or net worth).
- Income Statement – provides results of a company’s revenues, expenses, gains, and losses up to the reporting period. Basically, the whole and updated operations and financial activities.
- Cash Flow Statements – shows the report of changes and current status of the company’s inflow and outflow of the cash up to the reporting period.
- Supplementary Notes – this provides an explanation of activities that made financial impacts, other details on the account, and any other information that will support all three contents.
What does a financial statement do for your business?
Now you know what is a financial statement and what makes of it, you probably have an idea on its purpose. But to confirm, here are following reasons why it is useful to a business:
- Foresee the amount of taxation that the government will ask a business to pay.
- Determine the business’ sources and uses of cash and its ability to generate.
- Indicate the condition of the business by deriving financial ratios from the statements.
- See a business’ capabilities of paying back its debts. Also, lenders use this to make a decision about a company’s credit.
- Helps with the investigation of specific or certain business transactions (outlined in the disclosures that accompany the statements).
- Help investors decide whether they would invest or not to a business.
- Assist with union bargaining decisions.
Overall, the financial statement is an important aspect of running a business. Without it, you’ll be blind with it’s updated financial condition. You’ll lose money than earn it. Investors and lenders won’t even put interest in saving it. So, if you decided to widen your knowledge about it, then you’re thinking for a bright future for your business. It may sound difficult at first. But keep in mind that everything can be learned if you put yourself into it. Especially this one.
See Also: PREPARING YOUR ACCOUNTING BOOKS
