Everyone wants a successful business, but it can be difficult to measure the success of a business if you don't have clear measuring tools. To assess that your business is on the right track and can be considered successful, you need information about the financial health of your business regularly, and this can be achieved through financial statements.

Definition of financial statements and their benefits.

Financial statements are documents or written records about a business or company's financial activities and performance over a specific period. Financial statements are important because they provide information about the assets, liabilities, capital, income, and profits of a business. These reports can help you as a business owner make the right decisions for your business in the future.

Types of financial statements.

There are at least 4 main types of financial statements that a business or company should have:

1. Balance Sheet.

It is a snapshot of the financial condition of a business at a specific period, showing the assets, liabilities, and equity/capital of your business.

Assets

These are the resources your business owns, such as cash, accounts receivable, land, buildings, equipment, etc. Assets are usually divided into two categories: current assets and fixed assets.

Liabilities

These are the debts or obligations that your company has to pay to others. Liabilities are usually divided into two categories: current liabilities and non-current (long-term) liabilities.

Equity

It represents the wealth your company owns and usually increases with additional investments or business profits. Equity can be determined by calculating the difference between assets and liabilities.

Equity = Assets - Liabilities.

Balance sheet example
image source : https://www.investopedia.com/terms/b/balancesheet.asp

2. Income Statement.

The income statement contains information about the financial condition of a business or company during a specific period, indicating whether the business has made a profit or incurred a loss. This statement can be used as an evaluation tool to determine what the business owner should do to improve their business. There are two types of income statements, namely single step and multiple step.

Single step.

Relatively easier, the calculation method involves simply adding up all the total revenues into one group and then subtracting it from the total expenses/costs. The single step method is usually more suitable for small businesses with a simple financial structure.

Multiple steps.

It is more complex than the single step method, as the calculation of revenues and expenses/costs is divided into several stages. For example: First, the operational income of the company derived from operational activities is subtracted from the expenses/costs of operational activities. Next, the non-operational income is also subtracted from the expenses/costs of non-operational activities. This method will provide more detailed information.

Income statement example
image source : https://www.investopedia.com/terms/i/incomestatement.asp

3. Cash Flow Statement.

It contains information about the movement of cash in a business or company during a specific period, including both cash inflows and outflows. The cash flow statement is usually divided into several categories, namely cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. The cash flow statement can be used to indicate whether your business can cover short-term expenses such as bills and salaries.

Cash flow example
image source : https://www.investopedia.com/investing/what-is-a-cash-flow-statement/

4. Statement of changes in equity.

Contains information about changes in equity in a business or company over a specific period. This report also allows us to determine how much money can be retained by the business/company. The data required to create a statement of changes in equity includes the initial equity owned by the company at the beginning of the current period, personal withdrawals by the business owner, as well as the amount of net profit and loss during that period. This report can be prepared after making an income statement first.

Conclusion

If you want to regularly assess the financial condition of your business or company, and help you make decisions regarding your business in the future, then financial reports are essential to have. Besides being beneficial for you, these financial reports are also useful for investors as they serve as a basis for considering investing in your business or company.

We understand that creating financial statements is not an easy task and requires a specialized expert to do it for you. However, with the right software, you can easily, quickly, and accurately create financial statements. If you need financial software that can provide financial statements for your business, we can help you make it a reality. Please consult your business software needs with us, and we are ready to create it specifically for you.