If you’re a small business owner, you may or may not have an accountant working for you. Many small business owners choose to prepare their financial statements. This has the benefit of providing you with details regarding your business and the state of your finances. It can also enable you to make more informed business decisions, as well as better forecasts.
A financial statement is essentially the complete record of a company’s financial health. Your expenses, your income, your liabilities, as well as all other data related to your business’ finances will be available on your financial statement.
What is a financial statement?
A financial statement is an official record of a company’s income, expenses, liabilities, assets, and more. The financial information is a part of the business plan but can also be prepared without it. A financial statement is also needed for audits, as well as tax purposes, and other official work.
Your financial statement should consist of three parts:
- The balance sheet
- The profit and loss statement
- The cash flow statement
Data gathered from these three will enable you to make more informed decisions when forecasting your business profits for the upcoming years. Your financial statement will also be sent to every stakeholder, internal as well as external.
In case you’re applying for a loan, then a bank or an investor might ask to see your financial statement. This helps them to evaluate how risky your business is as an investment. It’s also easier to pore through financial statements and compare them to those of other companies for investors.
How do you prepare your financial statements?
A financial statement is an important official document that’s a part of your overall business plan. Investors and lenders often ask to see your financial account before they agree to give you a loan. This is as your financial statement contains valuable details about your company’s financial health.
Your financial statements consist of three parts:
The Balance Sheet
Your balance sheet contains the complete details on your assets, liabilities, available cash, inventory, stocks, rent, as well as other income and expenses.
To make your balance sheet, you have to create two lists on a piece of paper. On the left side of the report, list out all your assets. This includes your cash, inventory, as well as other company assets.
On the right side of the page, you should start listing out all your expenses. This includes your accounts payable, loans, credit card balances, as well as other costs.
Finally, add up the figures on each side. On your left side, you’ll have the total value of your assets. On the right side, you’ll find your total expenditure. You’ll need to subtract your spending from your investments. The amount you’re left with is known as your equity.
The Profit and Loss Statement
This is also known as your Income Sheet. It contains the complete list of income and expenses within a certain period of time. You should include all your sources of earning for the time period you’re making your income statement for. This includes any additional sources of income you have, such as from renting out property.
If you sell products, then consider both your wholesale as well as your retail inventory. Your expenses should similarly take into account every single expenditure you made during that time period. This can include the cost of materials, buying stock, utility bills, the cost of renting equipment, and more.
Once you’ve listed out your total income, as well as total expenses within the specified time period, it’s time for the final step. You’ll need to subtract your total expenses from your total income. The amount you’re left with is your bottom line.
Your profit and loss statement shows you how much income you are making and where your expenses are going. This statement can be a useful tool when you’re creating your business budget.
The Cash Flow Statement
Your cash flow statement details the inflow and outflow of cash in your business. To make your cash flow statement, you’ll need to list out all the income and expenses of your business within a certain period of time.
The cash flow statement clearly illustrates where your money is going. You can use cash flow management software to automate a lot of your cash flow processes and get the data immediately.
What should you include in your financial statement?
Your financial statement should be created in such a way that it follows the norm set by the nation’s accounting principles. You should provide all the information that is expected, and detail the financial condition of your company.
Since your financial statement will be sent to all the stakeholders, there are specific general terms you should abide by. According to accounting principles that are generally followed in the US, you should add the following to your financial statement:
- Assets
- Liabilities
- Gains
- Expenses
- Revenue
- Losses
- Equity
- Any investments made by the owners
- Comprehensive detail on the business’ income
What are the benefits of making a financial statement?
When you prepare your financial statement, you’re also providing yourself with important financial information about your business. You’ll be able to clearly see how much money is coming in, as well as where that money is going.
This can enable you to make better forecasts about your business’s future.
Financial forecasts
Financial forecasts can help you gauge what the estimated profits are for your business over a period of time. You can create a spreadsheet where you create financial projections for your business for a period of three years.
Preparing a budget for your business
Your business’s budget should take into account your fixed as well as variable costs. Fixed costs are those that remain the same every month, such as your payroll or rent. Variable costs can change from month to month, such as utility bills or procuring materials.
You’ll need enough each month to meet your fixed and variable costs. If you have anything left over after that, then that amount is your profit.
Projecting your business’ net profit
This is also known as your ‘pro forma profit and loss statement.’ Your profit statement should be projected for a period of at least three years.
Finding your business’ break-even point
This is the amount of money you need to make to meet all of your business’ expenses for the month.
Conclusion
A financial statement is an official document that details crucial financial information about your business. It is usually sent to internal and external stakeholders and is made in accordance with the general accounting principles accepted in the US.
A financial statement is divided into three sections. These include the balance sheet, the profit and loss statement, as well as the cash flow statement. Your financial statement can help stakeholders, as well as potential investors, learn about the financial health of your business.
By preparing your financial statements, you should also have a clear idea regarding your business’ finances. Your financial projections for the coming three years should also be included in your financial statement. By bookkeeping regularly and monitoring your accounts, you should also be able to find the break-even point for your business.
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