Whether you're looking for investors for your business or want to apply for credit, you'll find that these four types of financial statements can help you.
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Updated on: August 27, 2024 · 9 min read
If you're a small business owner, you may be thinking that your accountant is the only person who could possibly be interested in your business's financial statements.
But if you're looking for investors for your business, or want to apply for credit, you'll find that four types of financial statements—the balance sheet, the income statement, the cash flow statement, and the statement of owner's equity—can be crucial in helping you meet your financing goals.
A financial statement is a formal record of a business’ financial condition and activities. These documents describe the business’ performance, cash flow, and overall economic health over a specified period.
Here’s what you should know about financial statements:
Although the purposes of each type of statement vary, business owners and external stakeholders use them to make informed decisions, ensure regulatory compliance, and plan for the future.
It's important for the small business owner to understand these four types of financial statements and the information they provide for the investor or creditor interested in providing funds for your business.
Both individually and taken together, these financial statements give a potential investor or creditor a wealth of information and can have a serious impact on your business's ability to obtain the funds or financing it needs.
Also known as a statement of financial position, or a statement of net worth, the balance sheet is one of the four important financial statements every business needs.
Key components of a balance sheet include the following:
Based on the basic accounting equation, or balance sheet equation [Assets = Liabilities + Equity], the balance sheet provides a snapshot of a business's assets, liabilities, and equity.
It also provides users with a look at the business's financial position at a specific point in time, and financial statement analysts use the information it contains to calculate several important financial ratios.
To understand what this type of financial statement looks like, you can reference a quarterly balance sheet prepared by Deluxe Home Furniture, a hypothetical company, as an example:
Based on the balance sheet equation, the total liabilities and stockholders’ equity would be $459,745 as of the date above, or the same as the total assets.
The income statement is another important financial statement for your small business. It provides users with a picture of the business's financial performance over a specific period of time.
Also known as a statement of revenue and expense, or a profit and loss statement (P&L), the income statement is a statement of earnings that shows a business's operating and nonoperating revenue and expenses.
Like the balance sheet, the information contained in an income statement is used in financial statement analysis to calculate financial ratios that provide users with further insight into a business's financial performance. Here are the typical categories you’ll see on an income statement:
Unlike the balance sheet, however, the income statement covers an extended period (month, quarter, or year) rather than a specific point in time.
Here are the main takeaways from Deluxe Home Furniture’s income statement published in the same hypothetical quarterly report:
The cash flow statement, also known as a statement of cash flows, or a statement of changes in financial position, is an important financial statement that gives users an understanding of how well a business is managing its cash flow.
Using the information in a cash flow statement, users are able to see whether a business is generating sufficient cash to meet both its debt obligations and its operating expenses.
The typical cash flow statement format provides information about a business's cash from operating activities, cash from investing activities, and cash from financing activities.
Here’s what each category means:
This statement can reveal cash flow problems that might not be apparent from the income statement alone. A business can be profitable on paper but still face cash shortages if, for example, it must make a large investment in new property or customers are slow to pay invoices.
Deluxe Home Furniture reported the following figures in its cash flow statement for the period ending on March 31, 2024:
The fourth financial statement that a business needs is a statement of owner's equity, also known as a statement of changes in equity, or a statement of shareholders' equity.
It shows the business's retained earnings—the profit kept, or retained, within a business rather than distributed to owners or shareholders—both at the beginning and at the end of a specific reporting period.
Retained earnings are often used to either reinvest in the company, or to pay off the business's debt obligations. It provides users with information regarding the financial health of a business, as it shows whether the business is capable of meeting ongoing financial and operating obligations without requiring its owners to contribute more capital.
Statements of owner’s equity typically include these elements:
It’s worth noting that companies may include additional or different line items based on their organizational structure and business needs.
Some notable findings from Deluxe Home Furniture’s statement of stockholders’ equity include these figures:
Despite earning a profit, stock repurchases and stock-based compensation impacted the company’s equity, resulting in a slight decrease in stockholders’ equity for the period.
While preparing financial statements can be tedious, they offer numerous advantages for businesses of all sizes.
Here are five benefits to consider:
Regular review and analysis of a business’ financial statements are essential practices for any owner who wants to position themselves for long-term success. If you need assistance preparing or understanding your business’s financial statements, you might consider contacting an accountant or a business lawyer.
As you begin to review and create financial statements, keep these points in mind to extract useful insights:
By preparing each of these financial statements, not only will you be able to provide a prospective investor or creditor with important information that they need to assess your business, but also you will be able to identify trends in your business's performance that will help you to position your business for continued success.
You can work with your accounting professionals or engage an online service provider to help ensure that your business is compliant with its reporting and obligations throughout the year.
Start by maintaining accurate records for all financial transactions. You can use accounting software or spreadsheets to organize the data into the appropriate format for the statement you wish to create. If you have concerns, it’s worth asking an accountant for assistance to get it right.
Most businesses prepare quarterly and annual financial statements, but some may opt for monthly statements. The frequency ultimately depends on regulatory requirements, investor expectations, or loan terms.
Generally speaking, compliance involves following GAAP in the U.S. or IFRS internationally. These standards provide guidelines for recognizing, measuring, and reporting financial information. You’ll also want to adhere to specific rules for different types of transactions and accounts, so consider consulting a financial professional for help.
Financial statements demonstrate a company’s financial health but from different perspectives. For instance, the income statement’s net income affects the equity statement, which, in turn, impacts the balance sheet. Likewise, the cash flow statement demonstrates income with actual cash flow movements.
Belle Wong, J.D. contributed to this article.
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