At the end of every financial year, every business must prepare three major financial statements:
Cash Flow Statements
If you are a small business seeking funding for growth and expansion, your financial statements will be the first documents that investors would be looking for. It is critical that you keep track of your financial data that shows your company’s financial health.
Keeping accurate financial data can also help you determine the correct price for your products and/or services along with all other essential factors such as identifying your margins, determining your cash flow, and filing your taxes with ease.
What is Income Statement?
The income statement shows the financial performance of your business during a specific period. The timeframe to prepare this report could be monthly, quarterly, or every fiscal year but there may be periods in between, too. Data in the income statement shows a summary of the revenues and expenses incurred during an entire period covered by the report and it is also referred to as profit and loss statement. It is also called statement of earnings, statement of operations or statement of income.
Simply put, how much money did you make and how much money did you spend, which shows the net result of the income your business generated at the end of the period.
What makes an income statement important? Well, common sense suggests that if your business is not making money, then what is the point of doing business? And the income statement shows you whether or not your business is generating profitable earnings.
In another perspective coming from bigger firms where shareholders are involved and stock and bond prices keep the business alive, the income statement provides the data showing the company’s ability to earn profitably over a long term period driving the stock and bond prices up. It also provides the data showing its operating profit or EBIT that is critical to pay for the company’s debt obligations; otherwise, it will have to declare bankruptcy or sell out.
Then, how does it work? Here’s the basic equation:
Revenues – Expenses = Net Income
What is Cash Flow Statement?
This statement shows the movement of the money - what goes in (or cash inflow) and what goes out (cash outflow) of your business. There are three activities engaging every business:
Cash is the described as the economic fuel that runs the business activities and keeps it alive.
What makes the cash flow statement important? Simple. A business owner must know where the money goes and if it’s coming back. If all your money is going out and you don’t know where it goes, your business will soon run of cash that stops all your business activities.
Then, how does it work? Cash flow is a two-way process: outflow and inflow. What goes out must come back in and this cycle is what sustains your business life. Cash outflow is the money that goes out for purchasing equipment, inventory, and all other expenses and payments. Cash inflow are your cash sales, accounts receivable collections, loans, and other investments.
Here’s how you calculate your ending cash balance:
You look at the balance sheet to find out the financial position of your business. The balance sheet is a statement that shows how much a business is worth at a specific time period.
It is considered as the most important of all three financial statements discussed in this article as it shows the entire snapshot of your business financial health. It outlines the total assets owned by the business and the total amount of its debts including equity, which are items such as additional paid-in capital, common shares, and accumulated profits.
If your balance sheet shows higher debts than your assets, it suggests insolvency and means you have mediocre financial management.
What makes a balance sheet important? If you are considering to apply for additional debt or equity financing or if you are looking at selling your business, you would like to know the net worth of your business.
Then how does it work? It doesn’t seem simple but it is not as complicated as it may look like. There are two sides and each must be equal the other to show a balance. While there are two sides, there are actually three parts: assets, liabilities, and owner’s equity or capital.
Here’s the simple logic: your business must be able to pay for its assets. You may borrow money from lenders or investors or the bank. Below is the formula:
Assets = Liabilities + Owner’s Equity
Financial Reporting Software for Small Business
Preparing financial documents could get too overwhelming for a small business owner.
There are too many things to consider and the process is a tedious one. You have to deal with paperwork that never seem to get done.
There are two critical obstacles in completing your financial report:
Knowledge of bookkeeping principles and practices
As a business owner, you know very well that time is also money. And if you have no idea about what you are doing, you must know that manually preparing your financial statements leaves high margin for error.
When things seem too overwhelming, you can simplify the process, save time, and be more productive to drive growth to your business. You can make sure that your financial statements and all other financial records are quickly and easily prepared with higher rate for accuracy. Automate.
Using a reliable bookkeeping software such as QuickBooks with the help of trusted professional financial advisors to prepare your financial statements will reward your business in the long term.
If you are ready to automate and leave your financial statement worries to be a thing in the past, you can start taking advantage of FAS' QuickBooks Training.
Learn all key features of each of the bookkeeping software package that your business can take advantage of and find the ideal package that works best for your business.
We help you plan, forecast and analyze your financial data
so you can get on top of your finances today to grow your small business big tomorrow.
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