Do you need help understanding your business financial statements? You have come to the right place, here we will discuss the three main business financial statements. Starting a business can be nerve racking especially trying to figure out how much the business made or how much is coming out. That’s where financial statements come in and help you keep track of your business. Let’s expand your knowledge on the basics of business financials.
What Are Financial Statements?
Financial statements are written documents that outline a company’s operations as well as its financial success. Government organizations, accounting firms, and other entities frequently audit financial statements to assure they are precise and for reasons related to taxes, financing, or investments. The balance sheet, income statement, and cash flow statement are the three main financial statements for Businesses. Let us get into what each of them consist of.
What is a Balance Sheet?
A balance sheet is a summary of a company’s assets, liabilities, and shareholders’ equity. The Balance sheet gives insight about your business and its operations.
- Assets include two categories which are current and non-current assets. Current assets are cash equivalents, Accounts receivables, inventory, and prepaid expense. Non-current assets are properties, equipment, and intangible assets. The difference between current assets and non-current assets is that current assets are expected to be turned into cash in less than a year or during the annual business operation, where as non-current assets are expected to be held for more than a year.
- Liabilities are similar to assets where they have current liabilities and non-current liabilities. The difference is current liabilities will be paid off in less than a year or during the annual business operation where as non-current liabilities are exapted to be paid off at a longer term than one year. Current liabilities include accounts payable, wages payable, accrued expenses, and dividends. Non-current assets are all long-term debts which can include mortgages, sinking bond funds, or any loan that are long term.
- Shareholder equity is the last thing you will find on a basic balance sheet. Shareholders equity includes common shares and retained earnings.
What is an Income Statement?
An income statement gives an illustration of your business revenues, expenses, and net income. The income statement can be formed either quarterly or yearly for your business. This stamen is where you calculate your gains and losses.
- Revenue consists of the earnings from selling your product or service. Earnings such as interest are considered to be non-operating revenue and should still be included in the income statement.
- Costs of goods sold (COGS) is often subtracted from revenue earnings to gather the gross profit margins. By the name you can already tell COGS is the cost in materials which it takes to produce the product being sold or the work it takes to provide the service.
- Expenses are the cost your business has to pay in order to generate revenue. This can include employee wages, supplies, utilities, repairs, etc. Typically, you want to keep your expenses under control, meaning if expenses keep adding up you can find yourself at a loss.
- Net Income is calculated by taking all the gains and revenue minus the expenses plus losses. If net income is in the negative that would mean your business lost money that year or quarter. Some ways to help keep net income positive can be lowering some expenses as well as decreasing COGS while maintaining or increasing sales.
What is a Statement of Cash Flows?
The cash flow statement (CFS) gauges how effectively a business earns cash to cover debt payments, operating costs, and investments. The balance sheet and income statement are enhanced by the cash flow statement. A cash flow statement cannot be calculated using a specific formula. Instead, it has three sections that detail the cash flow for the many purposes that a business uses its funds. Here are the three sections in a cash flow statement:
- Operating actives include all revenue sources and expenditures related to operating the firm and selling its goods and services. Any adjustments to cash accounts receivable, depreciation, inventory, and accounts payable are included in cash from operations. Wages, tax payments on income, interest payments, rent payments, and cash earnings from the sale of goods or services are also included in this list of transactions.
- Investing activities include all cash streams and expenditures related to a company’s long-term investments. This group includes any payments connected to a merger or acquisition as well as the acquisition or sale of an asset, loans given to or received from suppliers, and customer loans. Additionally, this part includes purchases of permanent assets like property, plant, and equipment (PPE). In other words, changes to investments, equipment, or assets are related to cash from investments.
- Financing Activities includes the uses of cash distributed to shareholders as well as the cash sources from investors or banks. Loans, dividend payments, stock repurchases, equity issuances, debt repayments, and loans are all examples of financing activities
To wrap everything up, understanding a business financials is important when operating a business. Financial statements contain significant information on a company’s financial well being and business activities. They also help business operators to make well informed decisions to better their business. Here are websites that will help you gather more information about business financials: https://www.sec.gov/reportspubs/investor-publications/investorpubsbegfinstmtguidehtm.html