Understanding the Key Financial Statements of your Small Business

Why are Financial Statements essential?

Financial statements present a typical summary of the company’s financial position for a particular period of time, be it annually, semiannually, or quarterly. These financial statements serve a range of purposes for different stakeholders, including managers, employees, investors, borrowers, government, and others who have a direct or indirect interest in the company. The layout and format of small business financial statements are similar to statements of large companies, except a few items have different implications for small businesses. All these distinct features are provided by affordable accounting services.

3 Key Financial Statements for Small Businesses

Balance Sheet

A balance sheet comprises all the assets, liabilities, and shareholder’s equity of the small business at the end of a certain year. The balance sheet is the one that shows the financial health of the business at the end of the particular year. To make a balance sheet, you have to begin by mentioning your assets on the left side of the sheet consisting of the following items:

●                   Cash in hand or in the bank

●                   Debtors that owe you

●                   Cost of fixed assets such as equipment, vehicle, and machinery, and so on

●                   Value of inventory stock

●                   Any other tangible or intangible asset

On the right side of the sheet mention all your liabilities which consist of the following items:

●                   Creditors whom we owe

●                   Credit card balances

●                   Loans from bank

●                   Any other item that you owe.

Below liabilities there comes the shareholder’s equity, under which the following items include:

●                   Net profit (from the income statement)

●                    Cost of capital

●                   Long term loan

Adding the above assets and then subtracting the liabilities from these assets will give the amount known as owner’s equity.

For small businesses, the equation looks like this:

Assets - Liabilities = Owner’s Equity

Income Statement

An income statement or profit or loss statement (P&L) presents the expenses, revenues, and profit or loss for a period of time. First, list all kinds of revenue earned during a certain period and then total them. Next, list all the expenses incurred during that specific period and then total them. Then deduct total expenses from the total income. If the income exceeds the expenses then the company is having the profit and if expenses exceed the income then the company is at the loss.

The P&L is the perfect presentation of a company's profitability view, due to which it’s usually used to present the creditors and investors, whether your company has generated profit or incurred the loss during a certain period.

The net income of your business is also what will be used to regulate its taxable income every year.  This is derived by deducting the expenses of your company from its total income, which you can seek by using your P&L.

If you know the differences between accrual and cash accounting concepts, you can perhaps anticipate that the process that you select can actually tell the values mentioned on your P&L. As every technique has its individual effectiveness for identifying income, the P&L for any certain time will show various transactions or figures.

Cash Flow Statement

A cash flow statement depicts the inflows and outflows of cash and the closing cash balance during a specific period of time. The cash flow statement has three different parts:

●                   Cash flow from operating activities, the cash flow that is required to operate, consisting of debtors, creditors, and inventory.

●                   Cash flow from investing activities, the cash flow from long-term fluctuations in equipment, purchasing or selling assets, etc.

●                   Cash flow from financing activities, cash flow from purchasing debts, repaying loans, etc.

The statement of cash flow illustrates every of the company’s inward and outward transactions i.e. how you’re earning the money and how you’re spending the money during a given time period. The statement of cash flow takes the net income of your business (from your P&L) and takes any non-cash transactions from operating, investing, or financing activities to provide you a view of what actually happened to businesses’ cash in that period.

For instance, if any small business gets $1,000,000 in the capital, but their P&L gives a net loss of $50,000 at the same period, their statement of the cash flow will show a $950,000 Net increase in cash in that period.

From the above-mentioned financial statements, your business can have a more detailed picture of how it works, from where it generates profit, and how to make future decisions about the profitability and performance of the company. For this reason, cheap accounting firms are there to draft, analyze and interpret all the financial statements for your business.