Managing your finances through financial statements
Financial statements are a great way to mange your businesses finances because they are designed to provide you with an overview of your company's profitability and your business's short and long term financial condition. Your best bet when using financial statements to help manage your finances with your business is to prepare your financial statements on a quarterly basis, this gives you much better insight into how much money your company is making compared to spending.
Here is a closer look at the four types of financial statements, plus how the financial statements are used in business.
Number one: Balance sheet
This is considered to be a snapshot of a business's financial condition because it shows the financial condition of a business at the time the balance sheet is prepared. The balance sheet is going to report all of a company's assets, liabilities and owner's equity for a certain period, such as end of the fiscal year or calendar year, depending on which system your business uses. With the balance sheet, the assets must be in balance with the liabilities and owners' equity at all times, the assets must equal the sum of all liabilities and owners' equity accounts to be balanced. If the numbers are not equal, a mistake has been made somewhere or accounting rules are not being followed.
Number two: Income statement
This statement can also be referred to as the profit and loss statement; mostly it is referred to as this in countries outside the United States. This statement is used to show you how your business is taking their net earnings and turning that into their net income. Net earnings are turned into net income by figuring out the amount of sales that were made and then subtracting out all of the businesses expenses. The main purpose of this statement is to show people whether the company is making or losing money during the period it was prepared for. Just because a company is operating at a net loss during the period that does not mean that the business is not going to be successful because it is possible to have a net loss and still make money.
Number three: Retained Earnings Statement
This one is used to explain the changes that have occurred to a company's retained earnings during a certain reporting period. The statement provides a breakdown of any changes that have affected the retained earnings account. The information that is sued to prepare this statement comes from the income statement, the information that this statement provides is used later on for the balance sheet to make sure that everything equals out. Not all companies will file this statement separately, so you need to look for it in the balance sheet, a combined income statement and under the title changes in retained earnings.
Number four: Statement of cash flows
This statement is great for tracking where all of the cash has gone for your business; it is most commonly used to track all of a business's finances for the year. The reason for this is that the statement tracks all of the income and expenses of the business. This statement can be prepared quarterly or yearly, the quarterly preparing gives you a clearer understanding of where the cash has gone. This statement can be used to provide further information on a company's operating, investing, and financing activities, but it is also used to show the changes in the balance sheet and income accounts have affected the company's cash.
When preparing these financial statements your business must follow the rules and guidelines known as Generally Accepted Accounting Principles. This is required so all statements look similar, which, makes it easier for investors to decipher the information.