3 Significant Financial Statements Every Business Should Watch Out For
The financial statements reflect the business activities and the financial condition of an organisation, which is used by government agencies and accountants to conduct an audit and ensure precision in tax, financing or investment. A company's crucial financial statements include a balance sheet, income statement and cash flow statement. Also, investors and financial analyst depend on these statements to make financial forecast and to predict the organisation's stock price. Thus, as a businessman, it is vital to understand these numbers. A deeper understanding of these financial statements would aid the organisation to compete with its fellow competitors efficiently.
Balance Sheet would give an overall clear view of the company's current financial position. This would aid the organisation to compare its business performance on a monthly or yearly basis. Basically, accounting consists of three components - Assets, Liabilities and Equity. Asset refers to the resources owned by the company, liabilities indicate the payables to the creditors and equity is the remaining left out with the company. These factors help the organisation to estimate its owning (assets), owing (liabilities) and capital shareholder's investments (equity). By summing up equity and liabilities the organisation's asset could be estimated which would highlight the company's financial health.
The income statement is also referred to as profit and loss (P&L) statement, accounts the profitability of a business for a particular accounting duration. P&L statement verifies the company's profit and expenditures and presents a net profit or net loss. The income statement is the most crucial and influential among the three financial statements, as it categorizes the business costs enables the organization to analyze its expenses. Furthermore, P&L statement calculates and compares multiple incomes from diverse accounting periods, thus, helps in monitoring whether the profitability of the business is improving or deteriorating.
As the name hints, cashflow statements present the cash inflow and outflow of the business. Unlike the other two statements, cashflow just compares and reports the company's earnings and expenditures more specifically. The difference of cash inflow and cash outflow would be the final cash balance of the organisation. An organisation has a various source of cash inflow such as loans, sales, and accounts receivable collections, while, its cash outflows include inventory, equipment costs and other miscellaneous expenses.
With these financial statements, the organisation's management could analyze and understand the company's financial status and plan its future measures accordingly. Also, the management could prepare these reports on a monthly, quarterly or yearly basis, according to its requirement.