The Four Basic Financial Statements
While company expansion and rapid sales growth looks positive on the surface, you may still have cash flow issues or an inefficient portfolio of assets.
To keep you in the black, there are four key financial statements that report on the health of your company.
1. Balance sheets 2. Income statements 3. Statements of cash flow 4. Annual reports
Between them, you can get a holistic view of how your company’s financial decisions are impacting your business. Let’s take a look at each of them in a little more detail.
This is a snapshot of your company’s net worth and is split into three categories – assets, liabilities and capital. It’s called a balance sheet because your assets will always equal your liabilities + capital.
So how does it stay in balance? Here’s a simple example. If you went to the bank to get a $10,000 loan, your liabilities category will increase by $10,000 (the loan), while your assets will also increase by $10,000 (your extra cash in hand). The figures on each side of the scales will always increase in unison.
It can reveal a lot about a company – high levels of debt could indicate a liquidity problem, while a surplus of assets and no debt could be a red flag for inefficiencies.
Income statement Also known as a profit and loss statement, this reports on every form of income and expense generated by your business. Incomings include things like sales, interest and investments. Outgoings cover dividend expenses, operating expenses, cost of goods sold (COGS) and taxes.
To determine your financial position, you subtract your total expenses from your total income. If expenses outweigh income, you’re looking at a net loss. If your income comes out on top, your position is a net profit.
Most companies will create both monthly and yearly income statements and it’s generally viewed in a column format.
Statement of cash flow According to the US Bank, 82% of businesses fail due to cash flow issues. So this statement is a critical indicator of your financial health.
This report details three kinds of cash flow – operations, investing and financing. Positive cash flow from operations is a healthy sign, while the opposite could be a warning sign for bankruptcy.
But not all negative cash flow situations are bad. Many companies experiencing high growth will be investing heavily in infrastructure which will allow for increased sales.
Annual reports This is the one-stop-shop for your company’s financial activities of the past year. It encompasses the above three financial reports along with reports from key people in and out of the organisation – such as the chairman, CEO and auditor.
Investors and stockholders review the annual report from an investment perspective, while the government assesses these from a compliance and regulatory lens.
As a manager, it’s worthwhile spending the time to review the report and see how your department impacts the financial figures.
This is just a quick snapshot of the four financial statements, but it highlights the importance they play in business decisions. Treat these as your financial compass to keep the company on a profitable course.
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