If you’re a small business owner, you may be thinking that your accountant is the only person who could possibly be interested in your business’s financial statements.
But if you’re looking for investors for your business, or want to apply for credit, you’ll find that four types of financial statements,the balance sheet, the income statement, the cash flow statement, and the statement of owner’s equity can be crucial in helping you meet your financing goals.
Understanding Financial Statements
It’s most important for the small business owner to understand these four types of financial statements and the information they provide for the investor or creditor interested in providing funds for your business.
Both individually are taken together, these financial statements give a potential investor or creditor a wealth of information and can have a serious impact on your business’s ability to obtain the funds or financing it needs.
1. Balance Sheet
You are to known as a statement of financial position, or a statement of net worth, the balance sheet is one of the four important financial statements every business needs.
It also provides users with a look at the business’s financial position at a specific point in time, and financial statement analysts use the information it contains to calculate many important financial ratios.
2. Income Statement
The income statement is another important financial statement for your small business. It provides users with a picture of the business’s financial performance over a specific period of time.
Also known as a statement of revenue and expense, or a profit and loss statement (P&L), the income statement is a statement of earnings that shows a business’s operating and nonoperating revenue and expenses.
Like the balance sheet, the information contained in an income statement is used in financial statement analysis to calculate financial ratios that provide users with further insight into a business’s financial performance.
3. Cash Flow Statement
This is also known as a statement of cash flows, or a statement of changes in financial position, is an important financial statement that gives users an understanding of how well a business is managing its cash flow.
Using the information in a cash flow statement, users are able to see whether a business is generating sufficient cash to meet both its debt obligations and its operating expenses.
The typical cash flow statement format provides information about a business’s cash from operating activities, cash from investing activities, and cash from financing activities.
4. Statement of Owner’s Equity
The fourth financial statement that a business needs is a statement of owner’s equity, also known as a statement of changes in equity, or a statement of shareholders’ equity.
Retained earnings are often used to either reinvest in the company, or to pay off the business’s debt obligations. It provides users with information regarding the financial health of a business, as it shows whether the business is capable of meeting ongoing financial and operating obligations without requiring its owners to contribute more capital.
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