Updated: Oct 27, 2020
1- What are the financial statements?
There are 3 main financial statements which are:
The Balance Sheet: shows what your business owns and what it owes at a fixed point in time.
2. The Income Statement: shows how much money your business made and spent over a period of time. 3. The Cash Flow Statement: shows the exchange of money between your business and the outside world also over a period of time. To build those financial statements, first, you need to have an accounting system to record and bookkeep all your revenues and expenses. Then, you need to keep all your bills, invoices, receipts and record them in an accounting system. You can hire an accountant or do it yourself, using Excel or specific software.
2- The Balance Sheet
As mentioned above, a balance sheet provides detailed information about your business’s assets, liabilities and shareholders’ equity.
1. Assets: are tangible and intangible things that your business owns that have value. Examples of tangible assets are plants, trucks, equipment and inventory. Examples of intangible assets are goodwill, brand name and patents. Moreover, assets include investments and liquidity such as cash.
2. Liabilities: are amounts of money that your business owes to others. Like assets, liabilities are classified as current liabilities (within a year) or long term (more than a year). They can include mortgages, obligations, bank loans and expenses. Examples of current liabilities are: office supplies, rent, marketing expenses, payroll, taxes, loan payments and healthcare costs are some examples of current liabilities. Examples of long-term liabilities are debt obligations, deferred tax liabilities and bond payments. 3. Shareholders’ equity: is called capital or net worth. It is the money that would be left if you were to sell off your assets and paid off all of your liabilities. This leftover money belongs to the shareholders or the owners of the business. The following formula summarizes what a balance sheet shows: ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY
A company's assets have to equal, or "balance," the sum of its liabilities and shareholders' equity.
3- The Income Statement
An income statement typically includes revenue or sales, cost of goods sold, expenses, gross profits, taxes, net earnings and earnings before taxes. On top of the statement, you will see the sales recorded and below that, all the expenses will be deducted to arrive at the bottom line. The bottom line will indicate a profit or loss for a specific period. The following formula summarizes what an income statement shows: NET INCOME = REVENUE-EXPENSES
4- The Cash Flow Statement
Cash flow statement reports your business's inflows and outflows of cash. This is important because your business needs to have enough cash on hand to pay its expenses and purchase assets. The bottom line of the cash flow statement shows the net increase or decrease in cash for the period. The statement is divided into 3 components: Operating activities, Financing activities and Investing activities. 1. Operating activities: include incoming sales revenue as well as outgoing taxes and payments, such as those made to suppliers and staff (revenue-generating operations). 2. Investing activities: include the purchase or sale of long-term assets, like buildings, property, equipment and other noncurrent assets. This component includes the acquisition or disposal of long-term assets or investments that aren't included as cash equivalents, as well as the purchase or sale of marketable securities. 3. Financing activities: include loans payments and the issuing or buyback of stocks, the sources of cash from investors or banks, as well as the uses of cash paid to shareholders. Financing activities include debt issuance, equity issuance, loans, repayments of debt, stock repurchases, and dividends paid. The 3 financial statements are the foundation and the main tools used to conduct a financial analysis. By conducting an in-depth analysis of those statements, you will be able to assess the current situation of your business. This will allow you to spot the issues and correct them. This will also allow your update your business strategy and your direction. Please subscribe to our newsletter to get more tips and insights.