As a business owner, you know that keeping track of your financial health is crucial to the success of your company. One important tool in this process is the financial statement. But what is a financial statement, and how can you use it to make informed business decisions?
At E3 Bookkeeping, we understand the importance of financial statements for small businesses. As experienced bookkeepers, we help our clients understand and interpret their financial statements, so they can make informed decisions about the future of their business. In this blog post, we will explain what financial statements are, the different types that exist, and how to use them to make informed business decisions.
What are financial statements?
Financial statements are a set of documents that provide information about a company’s financial performance, position, and cash flows. These documents include the balance sheet, income statement, and cash flow statement.
The balance sheet is a snapshot of a company’s financial position at a specific point in time. It shows the company’s assets, liabilities, and equity. Assets are items that the company owns and that have value, such as cash, inventory, and equipment. Liabilities are debts and obligations that the company owes, such as loans and credit card balances. Equity represents the ownership interest of the company’s shareholders.
The income statement shows a company’s revenues and expenses over a specific period of time, usually a year. It shows the company’s profits or losses during that period. The income statement is also known as the profit and loss statement or the statement of earnings.
The cash flow statement shows the company’s cash inflows and outflows during a specific period of time. It shows how the company is generating and using cash.
Types of financial statements
There are two main types of financial statements:
External financial statements:
These financial statements are intended for external parties, such as investors, creditors, and regulatory agencies. External financial statements must follow specific accounting principles and standards, such as Generally Accepted Accounting Principles (GAAP) in the United States.
Internal financial statements:
These financial statements are intended for internal use only, such as by management and owners. Internal financial statements do not need to follow specific accounting principles and standards. They can be customized to meet the specific needs of the business.
How to use financial statements to make informed business decisions
Now that you understand what financial statements are and the different types that exist, let’s discuss how you can use them to make informed business decisions.
Monitor financial performance:
Financial statements can help you monitor the financial performance of your business. The income statement shows your revenues and expenses, so you can see if your business is making a profit or loss. The cash flow statement shows how much cash your business is generating and using, so you can see if you have enough cash to meet your financial obligations.
Financial statements can help you identify trends in your business. For example, if you notice that your revenues are increasing over time, you may want to invest in more marketing to continue growing your business. On the other hand, if you notice that your expenses are increasing faster than your revenues, you may need to find ways to cut costs.
Financial statements can help you compare your business to others in your industry. By comparing your financial statements to industry benchmarks, you can see how your business compares to others in terms of profitability, efficiency, and financial stability.
Plan for the future: Financial statements can help you plan for the future of your business. For example, if you want to expand your business, you can use your financial statements to see the best way to do so.
In conclusion, understanding financial statements is an essential skill for any business owner. By learning how to read and interpret your balance sheet, income statement, and cash flow statement, you can gain valuable insights into the financial health of your business and make informed decisions about its future.
At E3 Bookkeeping, we specialize in helping small business owners understand and manage their financial statements. If you need assistance with your bookkeeping or have questions about financial statements, don’t hesitate to contact us. We are here to help your business succeed.