Financial statements reveal the overall condition of your business. They also point out its strengths and weaknesses. There are three primary types of financial statements you need to be especially concerned with.
Let’s explore the three common types of financial statements for your business success below.
1. Balance Sheet
The balance sheet summarizes the company’s overall financial position. It’s crucial for understanding your current financial health. The main function of the balance sheet is to account for assets and liabilities. Assets may include:
- Cash and other liquid assets such as treasury bills and money market instruments.
- Accounts receivable (AR). This is money that is owed to the business.
- Inventory. Products that the business is offering for sale.
- Fixed assets. This includes property, buildings, equipment, machinery, and tools.
- Intangible assets. These are non-physical assets such as intellectual property. Common examples are copyrights, trademarks, and brand names.
A balance sheet must list liabilities as well as assets. This is money that the business owes to others. It typically includes wages, accounts payable, and interest payments on loans.
2. Profit and Loss Statement P&L
A profit and loss statement, sometimes called an income statement, is used to calculate a business’s performance during a specific period of time such as a year. It shows items such as:
- Revenue. This includes sales revenue and capital gains.
- Operating expenses. This may include rent, equipment, marketing, and other business costs.
- Costs of goods sold (COGS) for businesses selling physical items.
- Gross profit.
- Net profit.
To create a profit and loss statement, subtract total expenses from revenue to find the gross profit. Then calculate taxes to arrive at net profit.
3. Cash Flow Statement
The cash flow statement indicates the flow of cash into and out of the business. It provides a good indication of how well a business handles its cash flow. This statement covers three main areas.
- Operating activities. This includes cash flowing in and out of the business as a result of normal business activities. It includes sales of goods and services, payroll, income taxes, rent, and other operating expenses.
- Investing activities. Investments can include purchasing or selling assets, loans, or payments related to mergers and acquisitions.
- Financing activities. This includes cash from investors and financial institutions such as banks, dividends paid to shareholders, and payments for stock purchases.
To create a cash flow statement, you need to identify the reporting period and gather all relevant financial statements. You then subtract the total cash payments from the total cash receipts.
Getting the Maximum Value From Your Financial Statements
To get the most from your financial statements, keep these points in mind.
- Keep accurate records. Your financial statements are only as good as the data you include in them. For example, make sure your balance sheet has a complete list of all your assets and liabilities.
- Have an efficient system. Creating useful financial statements requires a good system. The right software can make it easier to keep good records. A reliable bookkeeper or accountant also makes a big difference.
- Take a holistic financial view. Balance sheets, profit and loss statements, and cash flow statements all give you a valuable but incomplete picture of your company’s financial health. You need to look at each of them so you have a broad, holistic view of your finances.
- Analyze your finances consistently. Your financial condition can change rapidly due to various factors such as the economy, seasonal demand for products, and changing trends. To have an accurate view of your business, you need to consistently update your financial statements so they reflect what is happening now.
Financial statements are important for knowing where your business stands and where you need to make adjustments. They are usually required when applying for business financing as well. However, there are alternative forms of business financing, such as invoice factoring, that can boost your cash flow and provide you working capital without requiring financial statements.
How Riviera Finance Can Help Your Business
Having a healthy cash flow and access to working capital is crucial for every business in order to grow, expand or take on new business. Invoice factoring can help, without the stringent requirements of traditional financing. Sell your unpaid invoices to an invoice factoring company, like Riviera Finance, and you can get working capital in as little as 24 hours.
Get in touch with one of our financial representatives online today and see how Riviera Finance can give your business the cash flow boost it needs.
