3 Main Purposes of Business Financial Statements
If you are currently a business owner, you have most likely heard the term “Business financial statements”. It’s a big part of the language of all business owners but interestingly enough, many don’t realize its value for their business.
There is one general purpose for business financial statements — to provide information about your business’ financial position, cash flow, and the results of operations. Understanding and keeping track of financial statements is absolutely important in planning for business growth or surviving the economic downturn.
Besides that, if you are looking for a loan to grow or expand your small business, you need to have updated records of at least three major business financial statements. Each one serves its own purpose.
Let’s take a closer look at them.
Also known as profit/loss statement, the income statement informs you whether or not your business is able to generate profit. It also reveals the nature of various expenses and the volume of sales. When reviewed a few times a year, it can be used to analyze and project future sales and expenses. So if your business has a positive trajectory, then you are most likely able to secure a loan based on how much profit you’re expecting to gain in the near future.
What is the purpose?
The main purpose of an income statement is that it’s a fantastic tool for figuring out if you can increase your business profits. You can tweak around the numbers in cost of goods sold to see if lowering any of them would result in profit increase. If you notice that you’re still not profitable, well, it means that you just need to sell more. The income statement will alert you where there are opportunities to increase your profits.
The balance sheet provides you with the most detailed overview of your business and its financial standing. It shows you the liabilities (the money you owe), and subtracts it from your business assets (items of value that you own). These liabilities are anything from credit card debt, unpaid invoices, taxes owed, etc. The assets are invoices owed to you, product inventory, cash.
What is the purpose?
The balance sheet shows you if your business owes more than it owns. This information is used to estimate the funding and debt position of your business. Banks and private lenders may want to see your business in a good position to approve you for a small business loan. You can use the information to monitor your progress and show lenders that you can be responsible when it comes to debt. Impress them by turning that balance sheet from negative to positive.
Cash flow is essentially the lifeblood of your business — it’s the money coming in and going out. It’s a useful statement to determine how much cash and how fast you’re spending. In order to understand your cash inflow and outflows better, you need to keep track of cash sales, interest on investments, customer invoices, and loans (inflows). You should also keep an eye on expenses you’ve already paid, the money you owe vendors and any debt payments (outflows). Then subtract the two and the number you get will help lenders decide on your business loan application.
What is the purpose?
Besides providing lenders with a better sense of your business’ financial situation, you can also get a good idea of your overall business operation. For instance, if your cash flow is negative, but your profits and revenue are stable, then something isn’t quite right. Balancing the cash inflow and outflow is a matter of timing. You should put time into getting your cash flow more balanced to get paid faster each invoicing cycle. This will also increase your chances of getting a small business loan much quicker and easier.
Ultimately, having a good understanding of your financial statements is important for your business. As a business owner, you should have access to two reports at all times: financial statements and your credit score. It’s a good idea to have each type of statement updated monthly; especially if you will be seeking funding in the near future. This is because the most time-consuming part of a loan application is the financial statement. So having it done ahead of time allows you to apply at any time without going through a whole process to pull and prepare all the paperwork.