Financial statements are the bane of most business owner’s lives. Filing and submitting them is looked upon with a large sense of doom and gloom, especially if you’ve not got a professional handling them. Their importance to any business, no matter how big or small, can never be understated.
As a business owner, it is important to understand the financial statements of your company. These statements provide you with valuable information about the financial health of your business, and are necessary to make informed decisions about its future.
We take a closer look at financial statements, what they are, and how they can be used to help you manage your business effectively…
What are Financial Statements?
Financial statements are formal documents that provide information about the financial performance and position of a company. They are typically prepared by accountants or financial analysts, and are used to help investors, lenders, and other stakeholders understand the financial health of a company. Financial statements are crucial since they relay information about a company’s revenue, expenses, profitability, and debt.
It’s essential to have reliable, accurate, comparable, and clear financial statements within the business. This is because they can heavily influence economic decisions taken by various stakeholders of the company.
There are three main types of financial statements that businesses in the UK are required to produce: the balance sheet, the income statement, and the cash flow statement (for larger companies).
The Balance Sheet
The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It shows the company’s assets, liabilities, and equity. Assets are anything of value that the company owns, such as property, equipment, or inventory. Liabilities are the company’s debts or obligations, such as loans or unpaid bills. Equity is the value of the company’s assets minus its liabilities. Equity represents the amount of money that would be left over if all of the company’s debts were paid off.
The Income Statement
The income statement shows a company’s financial performance over a specific period of time, typically a quarter or a year. It documents the company’s revenue, expenses, and profit or loss. Revenue is the money that the company earns from its operations. Expenses, on the other hand, are the costs associated with running the business. Profit or loss is the difference between revenue and expenses, and represents the company’s net income.
The Cash Flow Statement
The cash flow statement shows the inflows and outflows of cash for a company over a specific period of time. It includes three sections; operating activities, investing activities, and financing activities. Operating activities include cash flows from the company’s day-to-day operations, such as sales and expenses. Investing activities include cash flows from investments in assets such as property, plant, and equipment. Financing activities include cash flows from financing sources such as loans or stock issuances.
Small entities or SMEs aren’t required to prepare and file a cash flow statement. Non-small entities will be required to prepare a cash flow statement, unless they can appropriately claim exemption. Although SMEs aren’t required to file a cash flow statement, at Nordens we highly recommend all businesses to monitor their cash flow. Whether this be weekly, monthly, or quarterly, it’s crucial in order to identify pinch points as soon as possible. This will then enable informed action and better decision-making.
Why are Financial Statements Important?
Financial statements are important for several reasons. First, they provide a way for business owners to track the financial health of their companies over time. By comparing financial statements from different periods, business owners can identify trends and make informed decisions about the future of their businesses.
Secondly, financial statements are important for investors and lenders. These stakeholders use financial statements to evaluate the financial health of a company and to make decisions about whether to invest or lend money to the company.
Finally, financial statements are important for regulatory purposes. In the UK, businesses are required to produce financial statements in order to comply with government regulations. Without these statements or failure to submit them, it’s likely to result in a hefty penalty fine and an investigation from HMRC.
Our expert Audit and Assurance department meticulously go over all financial statements for your business with a fine toothcomb. This ensures they are compliant, updated, and in a position to exact real growth in the business. No matter how big or small your business is, or how much help you need with financial statements, at Nordens we’re here to help no matter. If this sounds of interest, then get into contact with our Audit Director, Lorraine Curtis, and she’ll be in touch.
How to Use Financial Statements to Manage Your Business
As a business owner, there are several ways that you can use financial statements to manage your business effectively. Here are a few tips:
Monitor your company’s cash flow
The cash flow statement can help you identify potential cash flow problems before they become serious issues. By monitoring your company’s cash flow regularly, you can take steps to ensure that you have enough cash on hand to meet your financial obligations.
Analyse your company’s profitability
The income statement can help you identify areas where you can improve profitability. For example, if your expenses are higher than your revenue, you may need to look for ways to cut costs or increase sales.
Evaluate your company’s financial position
The balance sheet can help you understand the overall financial position of your company. By monitoring changes in your company’s assets, liabilities, and equity over time, you can identify areas where you may need to take.
We hope this has outlined to you how to understand financial statements and how they can be used to benefit your business. If you’d like to know any further information on anything mentioned, or anything accounting related for that matter, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy talking you through your query.