Small business owners need to understand the three types of financial statements and the information they provide to the investor or creditor who is interested in providing funds to their businesses. These financial statements are crucial and give a potential investor or creditor a wealth of information that can have severe implications for the business’s ability to obtain the financing.
1. Balance Sheet: It is the one which shows the financial health of an organization or a statement of net worth, it is one of the four financial statements that every business needs. Based on the accounting equation, the balance sheet provides a business’s assets, liabilities, and equity. It also provides users with a look at the business’s financial position at a given time, and the financial statement analysts use this information to calculate various financial ratios.
2. Income Statement: The income statement depicts the revenue, costs, and expenses during any given period. It is the best methodology to view the bottom line which further guides the business lenders and investors regarding the flow of money and its impact. It also provides users with a picture of the business’s financial performance over a given time frame.
3. Cash Flow Statement: It is also referred to as the statement of changes in financial position; it is a significant financial statement that gives users an understanding of how well a business is managing its cash flow. In this manner, users can see if a company is generating sufficient cash to meet both its debt obligations and the operating expenses. A cash flow statement involves three types of activities:
i) Operations include all the business functions, one needs to operate, including accounts receivable, accounts payable.
ii) Investing include long-term changes to equipment, acquiring or selling, etc.
iii) Financing refers to acquiring debts, repaying loans, etc. which has an effect on the amount of cash in the bank but does not affect the bottom line.
Following all these steps are crucial as it will help in providing a prospective investor or creditor with relevant information regarding the business and will also help in identifying trends in the business performance which will be fruitful in the long run. One must also ensure that their business is compliant with its reporting and obligations throughout the year.