What is the top way to understand where your business stands? Look at the financial statements. There are four main financial statements that business owners create, each of which gives insight into a different component of your business. The income statement, balance sheet, shareholders' equity, and cash flow are the four financial statements you must understand to not only scale your business, but to keep third parties pleased.
Income Statement
The first financial statement is the income statement. This statement shows how profitable your business was for a period of time, which is usually one year. There are a few different categories found in this statement, including revenue, cost of goods sold, selling expenses, occupancy expenses, and general expenses.
Business owners pay close attention to this report as it outlines underperforming segments and where expenses need to be cut. The ultimate goal for the income statement is to have a positive number on the bottom line, known as net income. This means you earned more than you spent.
Balance Sheet
The next financial statement to understand is the balance sheet. This statement holds all asset, liability, and equity accounts. Your assets are everything you own, such as cash, accounts receivable, inventory, and fixed assets. On the contrary, your liabilities remain everything you owe, such as accounts payable, wages payable, and notes payable.
The equity account holds stock and ownership information along with past earnings. Ideally, you want your assets to exceed your liabilities, which tells you that your business is liquid enough to cover upcoming obligations. One of the features of the balance sheet is that the asset total must equal the liability total plus equity.
Shareholders' Equity
The statement of shareholders' equity is a separate statement that outlines the totals found in the equity account on the balance sheet. Beginning retained earnings, current year net income or loss, contributions, and distributions are the line items on this statement. Retained earnings are everything your business has earned or lost in the past.
The ownership structure of your business will determine the specific line items as partnerships will have contributions and distributions while corporations will have share transfers. The bottom-line number on this statement will flow into the balance sheet.
Cash Flow
The final statement that business owners need to understand is the statement of cash flow. This statement tracks changes in the cash account. There are three main categories of items found here: cash flow from operations, cash flow from investing, and cash flow from financing. Net income and changes in balance sheet accounts are found in the cash flow from operations category.
The cash flow from investing section holds income or loss from investments, such as fixed assets or stocks while cash flow from financing includes all transactions from banks and owners. The end of the statement reconciles the cash balance at the beginning of the year to the cash balance at the end of the year.
Summary
These four financial statements are documents that you are bound to encounter as a business owner. From banks requesting certain documents to tracking growth through internally created statements, you want a general understanding of what each statement means. For more information on the specifics of these statements or assistance piecing the data together, reach out to us today.
We prepare CPA compliant compilation year end financial statements, offer full bookkeeping services on all leading accounting software platforms, personal and corporate income taxes, or GST/HST and provincial sales taxes. In short, we do it all! No matter what province or territory you reside in. Please contact us with any question you may have regarding our services. Our goal is to answer your concerns within one business day.