If you’re a small business owner, you may be thinking that your accountant is the only person who could be interested in your business’s financial statements. But if you’re looking for investors for your business, you’ll find that four types of financial statements.
The statement of financial position, a statement of profit and loss and other comprehensive income, the cash flow statement, and a statement of changes in equity for the period—can be crucial in helping you meet your financing goals.
Understanding Financial Statements
The small business owner needs 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.
The statement of financial position
The statement of financial position, the same as the balance sheet is one of the four important financial statements every business needs. 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.
Statement of profit and loss and other comprehensive income
Statement of profit and loss and other comprehensive income, the same as 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. თhe 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.
Cash Flow Statement
The cash flow statement 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 can 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.
Statement of changes in equity for the period
The fourth financial statement that business needs is the statement of changes in equity for the period.
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.
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.