Important financial statements every business owner should know
Reflecting the monetary health of a business, financial statements are essentialdocumentswhich need to be evaluated carefully. A deft understanding of these statements would help you, as a business owner, to know key metrics of your venture and help you undertake crucial decisions.
Given below are some essential financial statements that every business owner should know about.
1. Income statement
Income statement, also known as ‘Profit and Loss Statement’, is one of the core financial statements that give you a picture of the income made, the cost required to make that income and the expenses incurred to operate a business.
Usually of a specified period - a quarter, fiscal or a year – this statement gives you a picture of your firm’s ability or inability to generate profit by reducing cost, increasing revenue or both.This statement helps you calculate essential profitability ratios, and with this statement you can understand whether your company has been able to make profits or not in a particular period.
2. Balance sheet
A balance sheet shows financial affairs related to your company’s:
- Assets: These include things that you own including equipment, inventory and checking account
- Liabilities: It includes things that you owe such as loans, payrolls, etc.
- Owner’s Equity: It includes capital investments that you’ve made into your business minus the draws plus the net income
Giving you a snapshot of the financial position of your company, a balance sheet helps lenders and creditors know the monetary health of your venture. You need to submit this to a financial institution if you intend to seek a loan. A balance sheet also aids in meeting unexpected expenses and understanding liquidity position.
3. Statement of cash flow
Another crucial financial report, a statement of cash flow shows you the amount of cash generated and used by your venture at any given point in time. Helpful in gauging short-term financing needs such as paying vendors, utilities, bills and other expenses, a statement of cash flow gives you an idea on liquidity available for immediate needs.
In this statement, the money coming in is recorded as cash inflow while the one going out is referred to as cash outflow. All the transactions are further categorised into 3 broad categories – operating, investing and financing. Knowing this statement would help you undertake key decisions related to your venture such as buying equipment, developing new products and undertaking expansion activities.
4. Trial balance
Trial balance takes all ledger balances and presents them in a single worksheet. This balance worksheet comes in handy during audits,and also helps lenders and financial institutions understand your borrowing capacity. It also ensures accuracy by giving you a bird’s eye view of the accounting transactions taking place in your organisation.
A trial balance is a prerequisite for preparing other financial statements as it helps you understand the exact profit and loss your company is making.Also, this information is needed by all stakeholders.
Knowledge of the above-mentioned financial statements would help you not only understand the monetary health of your company but also ensure competitiveness and transparency in business operations.