If you own your own business, you’ll need to understand – and produce – financial statements covering the income, assets, expenses and cash flow of your company. These documents are in a standard format and can be used by investors and other interested parties to assess and project profitability.
Learn more about financial statements – including what documents are included and how they may be used, right here. You’ll also get some helpful references to produce your own, including easy to complete templates.
What are Financial Statements?
Financial statements consist of 3 key documents which are produced by businesses to show their financial performance.
These documents are used by investors and analysts to assess how a business is doing. Investors may use financial statements to decide whether or not to fund a business, while individuals can use this information – or the commentary of analysts who have reviewed it – to decide whether or not to buy shares. Financial statements may also be audited by government agencies to ensure compliance with tax filing and payment.
Financial statements are important for business owners, too. By creating and analyzing your own financial statements you can more easily spot places where you may be able to cut expenses or improve cash flow and income. Armed with this insight you can make better tactical and strategic business decisions – and earn yourself more profit.
What do Financial Statements include?
Standard financial statements include 3 key documents – the balance sheet, income statement and cash flow statement. Different businesses will have very different data to report across these documents, but the format and flow is fairly standard to allow for comparison and checking. Here’s what each of the key financial documents includes:
The balance sheet is one of the key documents used by investors and analysts looking to assess the performance of a business. As the name suggests, this statement balances the assets of a company against its liabilities, including shareholder equity. It shows what the company owns, and what it owes to investors and creditors.
On the balance sheet you’ll find the assets of a company, alongside liabilities such as debts and creditors waiting to be paid. You’ll also see the equity owned by shareholders. The assets should balance the sum of the liabilities and shareholder equity – making the basic balance sheet formula:
Assets = liabilities + equity
Different companies may use slightly different reporting standards for their balance sheet, as they’ll have to describe different types of asset and liability. Usually, though, assets and liabilities are split into long and short term concerns, and presented with current assets coming first, followed by non-current assets, current liabilities, non-current liabilities and shareholder equity.
Check out the balance sheet example, and free balance sheet templates, available here.
An income statement can also be called a profit and loss statement (P&L), or statement of earnings. This document shows the company’s revenue and expenses, and gives a good idea of the day to day operation of the business.
Depending on the type of business, income statements may be more or less complex. However, they’ll all show the same basic information – the revenue and expenses incurred, and the resulting profit or loss over the time period. The income statement formula is as follows:
Total revenue – total expenses = net income
An income statement is an important tool for business owners as well as anyone thinking of investing. By creating income statements on a regular basis – every month or quarter for example – you can compare performance over time and look for better ways to grow your company.
Learn more about income statements, and get free income statement templates to help you create your own, here.
Cash flow statement
The final document included in a financial statement is a cash flow statement. This shows the movement of cash in and out of a business, including sales and funds from investments, alongside operating expenses such as payroll and rent.
Cash flow statements are usually split into 3 sections: operating activities, investing activities and financing activities. Operating activities include day to day income and outgoings through selling stock, paying staff and covering the rent and utility bills. Investing activities can include longer term flows of money such as buying or selling property or tradable assets. Finally, financing activities include the acquisition and repayment of loans, issuing or buying back shares and other investment transactions.
The cash flow statement is important to investors and business owners as it can show that a company is using its funds well, and can reasonably expect to continue to have enough liquidity to continue to operate.
Interested in creating your own cash flow statement, but need a template to get started? Check out the handy advice, ideas, and free cash flow statement templates available here.
Accounting and financial reporting may not be your favorite topic as an entrepreneur but understanding financial statements is a must for any business owner.
You may decide not to produce your own statements, and have an accountant or team member work through the details for you – but you still need to be able to read and understand your own business reporting to spot opportunities and risks. Use this quick overview as a guide, and check out the other linked resources to make a start on producing and analysing your very own financial statements.