Many financial reports provide an insight into a business’s past, present, and forecasted future figures. For companies, every financial report is important and insightful. The data that comes forward as part of financial statements is the foundation for any company’s corporate accounting. However, some financial statements are more essential to understand the financial health of a business while others are helpful but not as significant. Of all the financial statements/reports, three are of primary significance: Statement of Cash Flow, Income Statement, and Balance Sheet.
Accountant in Castle Hill are highly recommend that every business owner and company manager must regularly review these three statements to stay updated with their company’s financial performance.
Here’s why these three statements are important:
- Statement of Cash Flow:
Statement of cash flow is very specific to the context of business operations and expenditures made in cash. It has two categories: Cash outflow and cash inflow. Through these categories, the statement shows the overall liquidity of the company by considering cash transactions. The overarching aim of the statement of cash flow for businesses of all sizes is to show how much cash the company currently has. This insight is important for companies to determine if they are spending more money than they are generating.
A standard cash flow statement is broken into three parts: operating, investing, and financing.
- The operating section will show sales figures made within the duration of the statement.
- The Investing section is primarily for purchasing and/or evaluating assets and to show financial gains made on existing assets.
- The financing portion of the statement of cash flow focuses on capital structure financing.
Accountant in Castle Hill are specialize in creating cash flow forecast for businesses. Quite often business owners forget the importance of projecting when cash will be available and identify the seasonality in Cash flow. With the help of a detailed cash flow, business owners can make the right decisions in terms of spending their money.
- Income Statement:
As the name suggests, the income statement is a comprehensive statement detailing and calculating a company’s net income or loss. It monitors the debits made into the company’s account (money that is coming in) and credits transactions (money that is going out of the business account).
In essence, an income statement is one document that shows the financial performance of the business through each period of accounting. It details all the payments received vs all the payments made. It deducts the cost of goods/services (the expense) from the revenue to get gross profit. It then further deducts operational costs from the gross profit to give the company its annual/quarterly net income.
The income statement is also referred to as profit and loss statement, or P&L for short. Its key features include:
- Shows revenue and expenses of the business
- Gives a direct picture of profit and net income. Shows where is the money coming from and where it is going
- Is made over a considerable period such as quarterly, annually, or for two or more years.
- The Balance Sheet
The balance sheet is an end-of-the-period financial summary of the company’s total assets, liabilities, and shareholder and owner equity. It shows a comprehensive picture of the company’s assets, investments and earnings of those investments, and financial obligations. It shows all assets (current, non-current, tangible, and intangible) owned by the company and can range from inventory to property, liquid cash, and beyond.
The balance sheet is particularly important as it provides a snapshot of a company’s financial position at a specific moment in time, empowering a business owner or manager to establish the company’s most important ratios, such as solvency versus liquidity, that are particularly important for debt management. It can be used to identify financial trends and make more calculated financial projections and related decisions. It is mostly also the first statement investors seek to determine a company’s reliability.
These three statements are important because when combined each of these helps evaluators as well as business owners themselves to understand the true picture of the business. The profit and loss statement covers the operations, while the balance sheet shows a picture of the assets and liabilities, helping to understand if the business has been sustainable in doing business keeping all other related activities in mind. On the other hand, the importance of a cash flow statement cannot be underestimated, especially for start-ups because many businesses flounder trying to keep the cash under control. Cash is needed for day-to-day operations and payments. If there isn’t sufficient cash, the daily operations can be greatly impacted.
Accountant in Castle hill can look after your day to day accounting and also create these financial statements on a monthly basis. With help of these financial statements, you can assess the financial health of the business, and also calculate financial ratios that provide insight into the data, financial highs and lows, and the reason for them. They each provide different information but all interconnected and correlating. Hence, it is imperative for businesses, whether small or big, to have these three statements to understand their company’s operations.
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