Financial statements are an essential part of small business finances. They provide a snapshot of a company’s financial health and performance. Each provides valuable information that can be used to make decisions about the company’s future. Understanding these financial statements is essential for any business owner who wants to make informed decisions about their finances.
What are financial statements?
Financial statements summarize a company’s financial results for a specific period, such as a quarter or a year. These statements include three direct reports: the income statement, the balance sheet and the statement of cash flows.
1. Balance sheet
The balance sheet expresses the financial situation of a company. It shows three aspects of a company’s financial health: its assets, liabilities and equity (or capital). When combined, these three elements constitute the value of the company for the period covered by the balance sheet.
2. Income statement.
Also called the profit and loss statement, the income statement helps determine whether the company has made a profit or loss for each period. The income statement summarizes a company’s profitability and financial results for a given period. It focuses on revenues and expenses. This financial report shows what it costs to create your products and services and keep the company running. It is useful for comparing how a company’s revenues increase or decrease over several periods.
3. Cash flow statement.
A cash flow statement measures how cash flows through a company to keep operations running, pay employees, pay bills and invest in opportunities. It is the third major financial statement that businesses must prepare. Cash flow statements allow owners and partners to understand how a company is operating: whether there is meaning, process and predictability in operations, and whether the company is on a sound financial footing.
Anyone can learn how to create and extract information from a company’s financial reports. Investors, business owners and managers need to understand results and trends to run the business successfully.
If you are unsure of your financial situation, we would love to help!