Keeping track of a business’s financial statements is vital in the operations of the business. Just like large companies, small-scale businesses also need to accurately track the financial data of the company. So what exactly is a financial statement? A financial statement is a document or tool that is used by the business in order to acquire accurate financial information. A financial statement contains important information regarding the financial activities of the business such as the cash flow, the business’s assets and liabilities, and the net worth of the company. A financial statement is important especially if the business is seeking funding from other investors or lending companies. Without a financial statement, the business itself, as well as the lenders or investors, will not be able to see the financial status of the business.
There are various types of financial statements depending on the type of financial information or data that a business needs. In order for a financial statement to be effective, it needs to be done and updated on a regular basis. In this article, we will discuss the importance of a financial statement in small businesses, the steps in creating your own financial statement, the essential elements of a financial statement, plus some tips that will be useful if you need help in creating a financial statement, whether you own a small business or a large company. Aside from a financial statement, you can also download other types of statement templates on this website such as a sworn statement template, printable statement form, cash flow statement sample, etc.
Why Is a Financial Statement Important?
There are many reasons why a business financial statement is important. The reasons why a financial statement is important for small businesses are as follows:
- A financial statement is important in order for the business to accurately track the funds going in and out of the business on a daily basis. Through a financial statement, the business will also be able to see the overall profit for a specific period of time.
- Aside from the profit, a business will also be able to get the data on how much the business has lost. These losses refer to the finances spent to operate the business and other expenses.
- A financial statement is important since it shows the health of the business financially. The company will be able to get information on the current assets and liabilities that the business has.
- Through a financial statement, investors and lenders will be able to evaluate the financial performance of the business, which will help them decide whether to invest or to approve a loan for the business.
- A financial statement is important since this will help them make financial decisions for the business, as well as determine the direction of the company.
- An accurate financial statement allows the business to evaluate their tax liability. The amount of tax that a particular business will have to pay depends on their financial statements.
- A financial statement helps businesses identify errors and mistakes in their financial records. If any illegal activity is happening within the business, a financial statement will show inconsistencies or discrepancies in the numbers.
- A financial statement is an important document or tool that will help the business make decisions, plan, and foresee the future of the business.
Types of Financial Statements That Are Essential for Your Small Business
Financial statements are not only important in large corporations but also for small businesses. Small businesses also need to keep tabs on their finances to ensure the success and growth of the business. Below are 3 of the basic financial statements.
1. Balance Sheet: A balance sheet is a type of financial statement that outlines the company’s assets and liabilities during a specific period of time. Aside from the assets and liabilities, it also shows the different shareholders’ equity. Basically, a balance sheet is a document or statement that shows the current financial position of the business. The assets of the business must balance out with the liabilities plus the owners’ equity.
2. Profit and Loss Statements: A profit and loss statement, also commonly called an income statement, is a document that outlines the profit or revenue of the business, as well as its expenses for a particular period of time. An income statement shows the previous financial performance of the company and assesses its financial capabilities.
3. Cash Flow Statement: A cash flow statement focuses on the amount of money that is going in and out of the business. A cash flow statement is especially important to be able to track the cash inflows and cash outflows. Cash outflows refer to the cash the business has received for the sales, the accounts receivable by the business, loans acquired, and other investments that the business has done for a specific period. Cash outflows, on the other hand, refer to the expenses paid by the business, items and equipment purchased, and other payments that were done.
Useful Tips for Creating a Financial Statement
An effective and accurate financial statement is necessary for every business. When creating a financial statement, it is important that you base your document on information and data that you have gathered. If you need to create a financial statement for your small business, here are some tips that will help you create a financial statement to ensure that your document is effective. The tips are as follows:
- In order to get accurate information when creating your financial statement, always remember to use the right accounting system. A good accounting system will do the best job in keeping a record of all the financial activities of the business.
- An effective financial statement should have a good outline or format. Remember to use a template when creating your financial statement. Samples are also available for download in order for you to have a reference for the financial statement that you will be making.
- Always check all the information and data written in your financial statement before you finalize the document. Financial statements that contain wrong data will only defeat the purpose of your document as well as waste your time and effort.
- If you are new to making a financial statement, you can hire a professional accountant to assist you in creating the financial statement for your small business.
- Remember to create financial statements regularly since this document is important in order to operate the business smoothly.
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