In business, understanding your financial statements is essential; they’re a critical tool that guide business owners and they help them make informed decisions that benefit them and their business.
These financial statements reveal the financial health of a business. But they’re not exactly easy to interpret, so let’s explore financial statements and how they can help you and your business.
What are financial statements?
A financial statement is a report that shows the financial activities and performance of a business. They can cover any period of time, although they’re most commonly prepared at the end of a month, quarter or year. There are four basic types of financial statements in accounting:
• Balance sheet. These show what your business owns (assets) and what it owes (liabilities) at a specific moment in time. This is a useful starting point for identifying the value of a business.
• Profit and loss statement. Also known as an income statement, this type of report shows your business’s revenue and expenses. Expenses are subtracted from revenues to show your business’s profit or loss figure.
• Cashflow statement. These show the amount of cash that flows in and out of your business over a period of time.
• Statement of changes in equity. This report shows how much money your business keeps, rather than pays out to shareholders or owners.
What do financial statements reveal?
Financial statements reflect a business’s financial health, going beyond the surface-level figures to demonstrate your:
• Profitability. The income statement helps you understand your profitability by outlining your revenues, costs and expenses over a specific period.
• Liquidity. By presenting your assets and liabilities, the balance sheet shows whether your business is able to meet its short-term obligations to creditors.
• Operational efficiency. Cashflow statements show how cash ebbs and flows within your business, offering a comprehensive view of how efficiently your business manages its cash resources.
How you can use your financial statements?
If you want to get the most out of your financial statements, you need to be able to understand the story that the numbers are telling you. That can be tough to do if you’re new to the reports – but once you’re able to decipher the figures, you can use your financial statements to:
• Meet your obligations. If you run a limited company, you’ll need to include financial statements like your balance sheet and profit and loss statements in your statutory accounts each year. Financial statements are therefore essential.
• Inform strategic decision-making. Your statements can help you make strategic decisions with confidence. Whether considering expansion, diversification, or investment opportunities, a clear grasp of financial health ensures that your decisions align with the company’s overall goals and financial reality.
• Identifying growth opportunities. Financial statements can reveal opportunities that you might not have realised were available to you. This could include entering new markets, launching innovative products or optimising existing processes for increased efficiency.
• Risk mitigation. Financial statements can act as early warning systems, allowing leaders to identify potential pitfalls and implement risk mitigation strategies to protect against risks like market fluctuations, economic downturns or internal challenges.
• Stakeholder communication. You must be able to communicate your business’s financial health to stakeholders, whether they’re investors, employees or board members. Financial statements can help you be more transparent about the business’s past, present and expected financial performance.
Are you getting your financial statements right?
Financial statements can be challenging documents to create and even harder to fully understand. But the good news is you don’t have to struggle by yourself or become a financial expert. Instead, you can get the help of an accountant. At RPGCC we can help you get the most out of your financial statements, talking you through what they mean for you and your business.
We’re meticulous with the details, proactive problem-solvers and always keep our clients in the loop. With our support, you’ll have a partner you can trust and rely on.
If you would like to arrange a free initial consultation with a member of our team to discuss how we an help you understand or improve your financial statements contact us or call us on 020 7870 9050.
