Every business owner needs to know the basics of financial statements. Know this information if you are completing them yourself or if you are outsourcing to a bookkeeper.
Statements are difficult to analyze but are critical to the health of your business. Keep reading for the basics of what financial statements are and a breakdown of the main statements.
What are Financial Statements?
The purpose of financial statements is to understand how much money the business owes, how much is being made, and the difference between what is outgoing and incoming each month.
Compile an annual report with information from financial statements. Explain the year’s business numbers with employees, regulators, shareholders, stakeholders, unions, and vendors. These reports help you meet and plan yearly goals.
What are the Four Basic Financial Statements?
There are four main statements that every business owner should know. This includes balance sheets, income statements, cash flow statements, and equity statements.
A balance sheet breaks down your assets, liabilities, and equity. It will show depreciation for specific items from the date the item is obtained to the present day. The basis of this statement is from the accounting equation: Shareholders’ Equity = Assets – Liabilities
You may also hear the term “profit-and-loss statement.” You need your sales revenue and a list of your expenses during a specific period to prepare an income statement. This statement shows your business expenses and any depreciation over the specific period.
Cash Flow Statement
The cash flow statement is for both physical and virtual money transferred in and out of your business. It is a combination of information from your income statement and balance sheet. Compare cash from operating activities to your business’s net income to determine the quality of your earnings.
An equity statement is also referred to as a statement of owner’s equity. This statement reports the changes in company equity. Earned profits, dividends, an inflow of equity, withdrawal of equity, and net loss are shown on this statement.
Financial Statement Tip
When investing or purchasing from a company, read their financial statement. While doing so, beware of false numbers! These companies can use specific numbers and omissions within their statements to make them appear more profitable than they are. While this is not the norm, it is important to note that it is a possibility.
Outsource Your Financial Statements
An important part of owning a business is understanding financial statements. Make your life easier by outsourcing your financial statements. Hire a bookkeeper that you trust.
PL Consulting is your go-to resource for bookkeeping and accounting services. We serve the Baltimore, Maryland area and beyond. Our bookkeeping and accounting services are customized to each client. Your ideas are unique to your business, and we understand that. We help you maintain good records and financial statements.