Primary Financial Statements Aspects You Have To Know
Tracking financial data of a company is a mandatory task for running a successful business. Whether you own a start-up or a medium sized business, keeping track of your finances allows you to determine your cash flow and to make sure that your products or services are priced correctly.
Financial statements are also essential for businesses who seek funding or investors. The primary financial statements, the balance sheet and the income sheet, give investors an idea about the potential of your business and how much it can grow if you have a substantial budget on your hands.
When it comes to these two financial statements, there are a few important aspects any business owner needs to know.
The balance sheet offers you and potential investors a general picture of the financial situation of the business. This financial statement includes three main sections: assets, liabilities and equity.
This section of the balance sheet reflects the activities of a business, basically how your business’ funds are used on a daily basis. Any business have two types of assets: current assets and fixed assets. Current assets are holdings that can be converted to cash in a certain period of time and can include prepaid expenses, inventory and account receivables. Fixed assets, on the other hand, are essentials that will not generate money directly. Equipment, buildings, furniture, office supplies and other things that a business needs on a regular basis are included here.
Liabilities is a section of the balance sheet that includes the source of your business’ funds. This can include obligations to creditors, bank loans and other payments to stockholders. But, besides these long-term liabilities, a business also has short term liabilities that can include anything from taxes to accounts payables.
Another section of the balance sheet is dedicated to the money invested in the business by its owner. Owners are also considered investors since the capital they contributed can lead to the expansion of the business. The only difference stands in the timeframe the owners expect to get their money back.
Total liabilities represent all the monetary obligations a business have towards its creditors.
The last section of the balance sheet is easy to calculate with a simple formula: total assets minus total liabilities. This section shows the net worth of a business.
Also named the profit and loss statement, this financial statement includes the income and expenses of a business over a predetermined period of time. This type of financial statement shows the profit a business can have after paying all its expenses. However, this financial statement do not take into account any cash flow problems so that is why this statement should be an addition to the balance sheet.
The net profit of a business can be easily determined by subtracting the total expanses from the gross profit. In case you are not familiar with the gross profit formula, it is sales minus the sold goods cost.
In the cost of sold goods can be included all the materials used in the production process, taxes and inventory.
All businesses have accountants that create the financial statements for them but understanding the most important aspects of these statements, will allow business owners to adjust their business development strategies and will also enable them to write good financial plans that can attract investors.