For every business, knowing the organization’s financial health is essential to success. This is especially critical for small businesses and entrepreneurs who do not have a surplus of funds in case of emergency or may be ready to accelerate their business’s growth. Financial statements are key tools to understand the financial status of an organization and make sound decisions for the short-term and long-term future.
For some people, financial statements can be intimidating and can easily lead to avoidance. But fear not. Gift CPAs is here to help you embrace financial statements so you can better manage your business. Read on to learn about types of financial statements, how to read financial statements and resources to prepare financial statements.
What is a Financial Statement?
A financial statement shows the financial position of your company. There are three common types of financial statements:
- Balance sheet – As detailed in this NerdWallet article, a balance sheet is a statement of a business’s assets, liabilities and equity. It is a snapshot of the value of a business at a specific moment in time. Balance sheet items are calculated by subtracting what you owe (your liabilities) from what you own or are owed (your assets, cash, property and accounts receivable). The result is what your company is worth or your equity.
- Income statement – Also known as a profit and loss statement, an income statement summarizes a business’s financial performance over a set period of time — typically monthly. Income statements also can be generated weekly for a shorter-term perspective or annually to provide a 12-month financial picture. The income statement is useful to identify a business’s significant areas of revenue and expense as well as its profitability.
- Cash flow statement – A cash flow statement shows the inflows and outflows of cash to and from your business during a specific period of time. It details a business’s ability to fund its operating expenses and pay its liabilities. It illustrates whether cash flow is positive (meaning the business is receiving more cash than it spends) or negative (meaning the business is spending more cash than it receives).
Together, these three types of financial statements are often referred to as a financial statement package. If your business employs a bookkeeper, it is essential that they maintain precise records of every financial transaction in order to produce a complete and accurate package of financial statements.
Reading Monthly Financial Statements
The importance of knowing how to read financial statements cannot be overstated.
A piece in Harvard Business Review Online explains that a balance sheet is “designed to give insight into whether a company is succeeding or failing [thereby enabling business leaders to] shift their policies and approach: doubling down on successes, correcting failures, and pivoting toward new opportunities.”
Analyzing an income statement can help determine whether a business is “generating a profit; if it’s spending more than it earns; when costs are highest and lowest; how much it’s paying to produce its product; and whether it has the cash to invest back into the business.”
Studying a cash flow statement can “reveal what phase a business is in: whether it’s a rapidly growing startup or a mature and profitable company. It can also reveal whether a company is going through transition or in a state of decline.” Internally, business leaders may use a cash flow statement to evaluate if financial or operational changes are needed. A third-party such as a lender or investor may use a cash flow statement to determine if a company is well positioned for growth or if it is too high of a financial risk.
Preparing Financial Statements
If you don’t have an accountant who prepares financial statements for you, accounting software platforms can help make the process simple. QuickBooks, for example, will automatically produce financial reports for your business as long as every transaction is properly accounted for in the platform.
Get Connected Today
Contact Gift CPAs for more information about using QuickBooks and preparing financial statements, as well as our full scope of accounting and business services. We have years of experience working with small businesses to help with bookkeeping, taxes and other business needs. Make an appointment to meet virtually or at one of our five locations in Harrisburg, Mechanicsburg, Myerstown, Ephrata or Lancaster!