Business owners are responsible for the economic prospects of their business, the buck quite literally stops with them. Keeping an eye on the daily sales and expenses while aiming towards growth will only get them so far. If growth of the business is to be approached with both foresight and insight, there is a key document that any business owner needs their organisation to have …the financial statement.
The financial statements of a business help get funding and loans, as well as prepare for the future.
What is the Business Financial Statement?
The business financial statement is an at-a-glance financial resume. It doesn’t contain every receipt and item of expenditure, but rather looks at the totals that the business deals with on three scales: a balance sheet; the profit & loss statement and cash flow statement, each of which shows the companies performance over the past period of reporting from a slightly different perspective.
The balance sheet does what the name implies: balances the assets of the business. The property, equipment, and stock inventory is balanced against the liabilities: loan repayments, mortgage etc. to give an overall level of shareholder equity. This document creates an instant guide to the scale of the business as well as its overall economic health. The balance sheet is a snapshot that represents the state of the company's finances (what it owns and owes) as of the date of publication.
The balance sheet is an invaluable piece of information for investors and analysts; however, it does have some drawbacks. It is just a snapshot in time, it can only use the difference between this point in time and another single point in time in the past and because it is static, many financial ratios draw on data included in both the balance sheet and the profit & loss statement and cash flow statement to paint a fuller picture of what's going on with the company's business.
Profit & Loss Statement
The profit & loss statement looks at how profitable the company has been over the past period of reporting, including non-cash transactions such as depreciation. This gives a pretty good idea of the direction the business is going in.
Cash Flow Statement
And the final component is the cash flow statement. Covering the same period as the profit & loss statement, this part refers only to the tangible monies that have come in and out – giving an idea of how much there is within the business to pay suppliers or other expenses.
The Financial Outlook for the Business Now and in the Future
The profit & loss statement, like the cash flow statement, shows changes in accounts over a set period. The balance sheet, on the other hand, is a snapshot, showing what the company owns and owes at a single moment. It is important to compare the profit & loss statement with the cash flow statement, as under the accrual method of accounting, a company can log revenues and expenses before cash changes hands.
So the financial statement made up of these three documents should give the owner a clear, multi-scale picture of just how the business is doing – and where it’s going.