Before we talk about the financial statements, let us understand what are financial statements? and how financial statements help business?
What are the financial statements and how it helps business?
Financial Statements refers to a set of financial reports prepared to view and evaluate the company’s financial performance and position at any given point in time, usually at the closure of the financial year. The financial statements help businesses to measure the financial strength, performance and liquidity. In Short, these reports tell you about money in your business.
Among all the several financial reports, below are the five most important financial statements business owner should prepare and evaluate to understand the company’s financial performance.
Balance sheet
A balance sheet, also known as a "statement of financial position," reveals the details of the company's assets, liabilities and the amount owned by shareholders. It’s a key financial statement which states the financial position of the business on a particular date. This financial statement helps you to analyse how companies are funding capital assets and operations as well as current investor information.
A balance sheet gives you the snapshot of the overall health of the business including the economic resources the business owns, owes, and the sources of financing for those resources.
The higher the part of owners’ equity in comparison with debts, the more the company is financially autonomous, therefore solvent. On the other side, if debts are high and the company depends on them to finance the operational activities, a business can be said to be ‘doing good’ only if suppliers and banks credit lines are maintained well and are raised proportionately with company growth.
Profit & loss account or income statement
Profit & loss account, also known as 'income statement', tells you about the money spent or cost incurred in an organization’s effort to generate revenue, representing the cost of doing business. In short, this statement portrays the profitability of the business.
Profit and loss statement includes all the revenues which are then subtracted by expenses to arrive net profit for a given period. If you have earned more income than you have spent, then your business has made a profit.
Who doesn’t want to make a profit? Off course, every business. Therefore, this financial statement helps you know the profitability of the business, areas which are affecting the profitability and take suitable measures. Regular review of the profit and loss statement helps you to know the possible risks which it strikes you.
Cash flow statements and projection
The profit and Cash are often misunderstood term in the business. Profitability shown in the profit and loss statement is not equal to the amount of cash you hold at any given time. Making a profit is one side of the story which gets completed only when you generate cash out of it.
To know manage this, cash flow statements are prepared. Cash flow statement shows the cash inflow and outflow of the business. This financial statement gives important insights about the change in cash position across period i.e. increase or decrease in cash inflow and cash outflow. The cash flow statement is evaluated considering 3 key activities such as operating, investing and financing activities.
Preparing cash projection statement will help the business managing enough cash to meet the expenses and investment in a planned manner. You need cash to run your business. Any insufficiency in managing the cash flow will lead to the failure of business due to insufficient funds. Cash flow is the lifeblood of the business and needs to be managed efficiently.
There are easier ways to manage sufficient cash for your business. Read our 6 Tips Manage to manage cash
Accounts receivables statements
The most critical aspect of cash management in a business is collecting accounts receivable as quickly as possible. No matter how good your business relationships might be, giving credit to your customers means your business have to wait even longer to see income. The longer it takes, the higher the risk it possesses in the inform of cash flow issues and at some point, it may turn into bad debts.
Accounts receivables statement needs to be prepared and reviewed regularly. This financial statement includes the details of outstanding invoices which are yet to be paid along with overdue days.
A good practice is to regularly check the bills ageing report to know the long-pending invoices, follow-up and encash it as soon as possible. Having good credit policy and internal credit control techniques will help in managing accounts receivables efficiently.
This is tricky! You need a smart way to manage Accounts Receivables. Here are smart tips to manage accounts receivable efficiently
Budget and actual report
Every business, at a given point in time, will have a short term and long-term business expenses. It is critical for a business to plan the budget and track the actual spending for a given period. Budget and Actual report help you to identify the spending and revenue generation against financial projections included in the budget. A regular check will help you to recognize the areas where the spendings are over or under the budget and accordingly apply the necessary corrections.
Conclusion
Of all the financial statements, the above reports should be reviewed regularly to manage your finance better. For you to be on top of these reports, on-time availability of reports is very critical. Only when the reports are available on-time, it allows you to evaluate the performance and take on-time decisions. Automating your books of accounts using accounting software will ease the bookkeeping right from recording to reporting and more importantly, all the reports will available instantly so that the smart decisions can be made on-time.
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