Research has found out that 30% of businesses fail because they run out of cash. The statistics underline the need to keep your eye on your financial flow. The best indicators of the health of your business are the financial statements, records that all businesses should keep, regardless of the area of operation or size of transactions.
What are the Financial Statements?
Financial statements are records that show your business’s financial activities. The records capture figures of funds flowing into the business, their sources, money going out, and items of expenditure. The records have to be written for auditing, analysis, and filing purposes. Government agencies, auditors, and regulators use these statements to verify compliance. You will also use the statements to understand the financial position, strength, liquidity, and overall performance of the business.
Financial statements come in different formats based on the point of collection and the information they are supposed to capture. The statements are also timed since they reflect transactions and liquidity at a particular time in the life of a business. Some of the statements that businesses will require include an income statement, balance sheet, statement of equity, and cash flow statement, among others.
The format and details of a statement will depend on the financial management style adopted by a company or business. Footnotes and attachments may accompany these statements for clarity. They will help a user to understand the personalized element of entry so that it will guide the auditor, analyst, or anyone using the statement.
Elements of Financial Statements
A financial statement is not just designed for the business or entrepreneur. Shareholders, employees, management, bankers, suppliers, and other interested stakeholders will peep into the statements or demand the document regularly to make crucial decisions. The statements will also be crucial for accurate tax returns preparation and other statutory filings. Several elements must be captured in the statement so that it can serve the intended purpose. Here are the basic elements of any financial statement.
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Assets – these are resources owned and controlled by the business for which present or future benefits may flow to the business. When balancing the accounting equation, asset value will be the difference between equity and liabilities. Examples of assets include computers, land, cash, inventories, goodwill, prepaid expenses, and property, among others.
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Liabilities – Liabilities are obligations that the business must meet. They cause resources to flow out of the business or devalue your assets. Liabilities may be current, such that you have to settle them in 12 months or non-current- to be settled after 12 months. Examples of liabilities include bank loans, tax payables, overdrafts, borrowing from parent companies, and salaries payable, among others.
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Revenues – revenues are defined as an increase in the inflow of cash, enhancement in value of assets, or reduction in liability. All these actions lead to an improved equity position. Some of the revenues to be entered in your statement include sales, receipt of dividends, interests from bank deposits, and provision of services, among other activities.
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Expenses – expenses refer to a reduction in economic benefit or asset value that affects your equity position. It has an outflow effect and is timed. The entry has to be made accurately so that you can calculate the return-on-investment or break-even-point for a product or business. Some of the expense items include salaries, depreciation, tax, marketing cost, internet, and allowances, among others.
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Equity – it is regarded as what a business owes its owners. It is calculated as the value of business once its assets have been used to clear liabilities. Simply put, it is the difference between liabilities and assets.
A financial statement will depend on business needs and the type of business you are running. Professional financial services providers will help you to capture all the elements that define your business. The other elements you will find in a statement include losses, gains, distribution to owners, investments by owners, and such other elements. Each business should have customized statements that reflect individual needs.
Types of Financial Statements
A financial statement will result from an accounting report. There are numerous types of statements that capture your financial position. Some are basic and will be seen in all businesses. Others are unique because of your business structure, the industry you serve, and the nature of your operations. The type of system to be generated will also depend on the information that the recipient could be looking for. Here are the common types of statements you will find in a business.
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Income Statement – the statement captures the three main elements of finances in an organization. It will tell about the revenue, expenses, and profit or losses. It will help you to determine whether an entity is financially sound.
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Balance Sheet – the other name given to the balance sheet is a statement of financial position. It shows the net worth of a company because it will indicate how equity, assets, and liabilities balance. The statement is released after a set period.
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Statement of Change in Equity – the statement will capture contributions from all shareholders, shifts in equity value, and the balance at the end of an accounting period. The statement will capture the classification of capital, retain earnings, total share capital, the dividend paid, and reserves, among other equity elements. If the balance sheet and income statement are accurately prepared, the Statement of Change of Equity will also be accurate.
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Cash Flow Statement – the statement helps an analyst or business owners to keep track of financial flow within an organization or business. The statement captures three sections; cash flow from investment, flow from operations, and cash from financing activities. Each business will have a unique methodology approach. The statement will also capture direct and indirect flows. This is the basic statement that every business or organization must prepare. With online bookkeeping services, you can prepare the most comprehensive and accurate cash flow statement for your business.
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Notes to Financial Statements – The notes help readers or analysts of your financial records to understand your entries better. For instance, you might need to explain the change in value for fixed assets. You provide an explanation or more documents to a reader.
Accurate recording of your financial transactions will make it easier to monitor the financial health of your business. Prepare relevant and accurate statements for internal and external consumption. The assistance of a professional financial expert will simplify your work.
Financial Plan For Business
A business plan is a concept until you key in the numbers and figures. It takes detailed planning to execute even the simplest business idea. Planning helps you to understand financial implications, regulatory requirements, operational needs, human resource implications, and projections, among other factors. It is at planning that you identify the need for Accounting Outsourcing to keep your operational expenditure at the lowest and take advantage of the expertise that comes with outsourcing. A business that is planned will break even faster and deliver excellent services to the target customer base. You become a part of the only 10% of entrepreneurs that will mark the 10th anniversary.
Last Word
The strength of a business lies in its Cash Flow Management tools and traditions. An entrepreneur must prepare necessary financial records and engage professionals to assist in areas of difficulty. Without a proper financial recording, the health of the business will be compromised, leading to fatal failure.
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