Some financial experts would argue that financial reporting systems - such as financial statements - are on their last legs and run the risk of becoming unnecessary. However, until that day comes, business owners and managers need to understand the multiple uses of financial statements, not only for assisting the managing staff in devising future strategies but also to showcase confidence to investors, as well as reliability to financial institutions.
What Are Financial Statements?
A financial statement, sometimes called a financial report, is a company's official record of economic activities, structured in an easy-to-read format. While most modern companies, especially those directly connected with information technologies, use specialized software to portray most of this information in real-time, it is important to understand that most financial institutions do not.
The Four Main Financial Statements
These are the basic financial reporting statements that are included in all accounting reports. While they will be enough to portray all financial dealings for smaller businesses, larger companies and corporations will have to use additional analyses to describe these statements in larger detail.
1. A Balance Sheet portrays all assets, liabilities, and shareholders' equity.
2. An Income Statement depicts the income, expenses, and profits of the company.
3. An Equity Statement shows a change in equity between two points in time.
4. A Cash Flow Statement reports the company’s activities such as operations and investments.
What Are the Key Uses of Financial Statements?
While in the past accountants used financial statements to describe the company's financial health to the management, the primary use of a financial statement in 2018 is for the manager to convey the company's health and reliability to any interested stakeholders.
Additionally, regular financial statements will provide better data and a clearer overview of the company. This clarity will help produce more agile management, whose members will have more defined goals since the financial statement will tell them whether there is a looming problem inside any of the departments.
1. Understanding the Condition of Your Finances
While a manager should be familiar with the condition of the company's finances by regularly consulting the balance sheet, having a formalized financial statement will share this information with any investors and equity holders. This information will inform the group how their investment is doing, as well as what they can expect from the company in the foreseeable future.
2. Being Confident in Your Cash Flow
As the company's profit reports generally include multiple elements that are not cash-related, it's important to have your financial statements clearly cite whether the income is a result of cash exchange or other factors. Additionally, it’s critical for both the management and the shareholders to know if this cash is a result of non-operating income, such as investment.
Finally, having a good cash flow means that the company will have enough resources for asset acquisition and regular expenses, which is one of the most important aspects of a company for any investor or bank.
3. Showing Shareholder Equity
Every business owner knows the value of keeping their investors and shareholders satisfied. There’s no better way to do just that than by having perfect record keeping. Your income statements and shareholders' equity statements will prove you’re keeping the business on the right path. It will be much easier for these investors to trust you with their money – and future money – rather than try to sell or liquidate their assets.
4. Measuring Operating Results
An equity statement can show you whether the value of the company has grown over time - but that is not the only method of measuring results. The cash flow and tendencies connected to it can clearly showcase if the company is growing at a steady rate or if there are problems that need to be addressed by a change of strategy.
5. Communicating with Financial Institutions
Regular financial statements communicate to financial institutions that you are diligent in your record-keeping, and that your reports adequately portray the company's income, expenses, and cash flow.
This improvement in the relationship between your business and the bank can have multiple benefits, such as cheaper loans and better financing options.
6. Using Data for Analysis
The accountant will analyze your financial records to formulate the statement and the auditor will check these statements to see if there are any issues. After this technical analysis, you will be able to use the data provided to devise better strategies and tactics to further advance your company.
The statements can inform you if the market requires you to act more bullish or more bearish. It can also report on which aspects of your company need more of your attention.
The Importance of a Financial Statement
Now, more than ever, investors, shareholders, banks, and revenue services require higher accountability from business owners. This accountability and reliability will be rewarded in many ways, mainly by greater ease of doing business, but also with greater liberty for you as a business owner to devise your own plans and strategies as you see fit.
Finally, having good record keeping and detailed financial statements will help the management itself, which will have a clearer picture of their successes or mistakes and will be able to act accordingly.
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