Effective financial management is the key to the success and growth of every business. In turn, the goal of entrepreneurs is to grow their business and increase profits. Therefore business financial management and growth are highly dependent on each other. In this article we’ll look at the role of financial statements in business management.
There are three financial statements that every manager should know how to create, read, and analyze. They are:
- Balance sheet
- Income statement
- Cash Flow statement
These three documents are fundamental for businesses, and when analyzed together, they display the current financial situation of a business or can be used to see how well or poorly it performed last week, month, and half year ago. With these statements you can make more informed decisions or future plans, set goals for different campaigns and see if they were successful.
Balance sheet is also known as a “statement of financial position” or “net worth statement”. It is the kind of report that reflects a company’s total assets, how they’re financed, and debt or equity for a certain time period. In general it is everything that a company owns, owes, and how the company finances its assets. A balance sheet has the following formula: Assets = Liabilities + Equity.
You can see that the balance sheet is divided into two parts and means that assets of a company should be equal to or balance its liabilities and equity.
An Asset is something that a company owns and that has value. It can be tangible or intangible, for example, inventory, office equipment, vehicles, or any intellectual property.
A liability is an in-progress obligation for which a company must pay something off. All the liabilities are divided into current and non-current.
By current liabilities we mean that they’re due payable within the current year. As an example it can be wages payable, interest payable, and dividends payable.
Non-current means that they last longer than a year. As an example for non-current liabilities we can name warranty liability, long-term notes payable, mortgage, leases, and credits.
Equity (sometimes called “owner’s equity”) represents the amount of money that a company’s shareholders would’ve received if the company had to sell its assets or in the case of a company liquidation.
Look at the example of a balance sheet below.
You can see that it reflects all the company’s assets, liabilities (current and long-term), and equity.
The income statement is also called “profit and loss statement” or “the statement of revenue” and is one of an organization’s major fiscal reports that shows their benefit and loss throughout a period of time. Income statements help entrepreneurs spot whether they should work on benefit by expanding incomes, or by diminishing expenses, or both. It also shows how correctly a business chooses an approach to reach certain goals at the start of each fiscal period. Business owners or managers can refer to this document to see if the chosen approach was successful or not. After analyzing the income statement they can find even better practices to apply for receiving more benefits.
What’s the formula of an income statement?
Note that income is not receipts that reflect the money you receive or pay. Income is what you eventually see and report via your income statements.
What’s included in revenue and gains, total expenses and losses? We’ll explain below.
Total revenue and gains
This is what is usually included in revenue and may vary due to any local regulations:
It’s the income acknowledged through a company’s essential activities. For a company that produces something, this would be the revenue it gets after selling the product. For a company that sells products, this would be the revenue after all the buying and selling activities.
This is the income a company receives in some other way outside the main activities. For example, it can be income from interest on commercial capital, rental business property, or gains from foreign exchanges, etc.
Gain represents the net income a company receives from various activities that do not match operating or non-operating. For example if a company sells old equipment, cars, other property, or land.
Revenue should not be confused with a receipt that a company sends. Income is the money that the company has after completing all the stages of a deal.
An expense is the cost incurred by a company to receive revenue. Anything that is associated with the goods sold can be called an expense. For example, shipping, delivery, advertising, sales commission costs, etc. As for a company as a whole, an expense would be rent or salaries.
Financial losses arise from the excess of costs over income. Losses are incurred when the amount received for the sale of a product is unable to cover the costs associated with its production.
In the example below you can see an income statement and its components like revenue and expenses, and what kind of expenses a company had during one year.
Cash flow statement
A cash flow statement is another key for financial management of your business. It’s a budget summary that gives a complete vision of all the money flows of a company, including internal and external sources. It also includes payments or investments that a company makes during a certain period of time.
An organization’s fiscal allows investors to see all the transactions that were made, where the money went and how successful it was.
Whenever you check your income statement, you see the money you have on hand by fact. The role of a cash flow statement is to also show you some upcoming revenue that is not reflected in your reports yet.
Also, a cash flow statement shows how much money a company can use for any purposes it might need. It indicates changes in assets, liabilities, and equity that a balance sheet reports. In terms of making financial plans and predicting the future, the cash flow statement will help to see how much money your company will have in the future.
What is also important about this report is that whenever your company needs a credit or a loan, this will be one of the first documents that a bank will ask.
Here is an example of a cash flow statement given below with operations, investing, and financing activities.
Why you need financial statements
First of all, financial statements are a good way of measuring how well a company performs and how good a certain period of time was for a company. For example, whenever a company spends money on ads, hires a specialist for help or makes some investments, the effectiveness of this will always be reflected in the reports.
Another use of financial statements is budget management. For example, some businesses have their peak seasons and are less successful during others. It means that via financial statements it’s easy to determine good and bad periods and plan a budget around them.
Having the option to see your organization’s costs line by line on both the payments and income can show when exactly it is better to slow down and stop spending money, and when is the best time for business expansion, purchases, and hiring more staff. As an example, you can notice that you’ve been paying for a subscription that you no longer need, or that supplies you have been ordering are too expensive and you could’ve cut expenses on that. Seeing the overall picture of each dollar spent and what it means for your company’s total expenses can be rearranged and spent at exact time and what a company really needs. Consider utilizing financial reports as instruments to inspire and connect with your employees. It is easier for people to work in a team when they clearly understand why they are doing it and what their common goal is.
And, of course, well prepared financial statements is the guarantee of your peace of mind during tax season. With accurate reports you can be sure that any audit you may face will be smooth and quick.
The role of Synder
Having many kinds of financial statements is all well and fine but to make your data work for you, the reports should be 100% accurate. It’s impossible to make the right decision when all the data is only recorded approximately or according to general ideas. This way of making reports will lead you nowhere. That’s why you need to record all the financial transactions (both expenses and income) as accurately as possible and this is where Synder can help. The app will thoroughly record all the transactions to the last cent automatically and will provide you with the reports discussed in this article in two clicks.
Moreover, it will not only do bookkeeping for you, but will help to reconcile, file taxes, and customize bookkeeping flows that don’t fit a standard setup.
Financial statements are very handy and powerful when you know how to create, read, and utilize them to benefit your business. The more accurate reports you have, the more informed decisions you can make for your company.