Every business owner depends on their accountants for the computation of the financial statements of the business. It serves as an essential component of every firm. Why? Because this document provides the financial performance of a company. That’s why the government often checks its authenticity, ensuring that it has accurate information.
More so, financial statements can dictate whether a company has the potential to be a growing investment. Accountants accurately deduct taxes from the company’s profit, where it is one of the sources of the government’s money.
All companies must generate an annual report to view the company’s status for the past year. Financial statements include significant categories, which we will discuss below.
Balance Sheet
The balance sheet shows the total net worth of the company at a given time. It is composed of the assets, liabilities, and equity of the owner.
Assets
Assets represent a value that can impact the production of economic value that you can convert into cash. It includes all the liquid money and the infrastructure that the company has.
Many businesses invest in technologically advanced devices and materials. These items help improve the business flow in many ways, which offers a significant increase in your company’s value.
Liabilities
Liabilities are debts that the company has, whether a short-term or a long-term loan. The wages of the workers and the dividends to the investors are also part of the liabilities.
Aside from that, your companies expenses are part of the liabilities, too. Suppose you’re renovating your workplace, the amount you owe interior painting contractors and the construction firm will be part of your liabilities. Thus, affecting your overall equity.
Equity
On the other hand, equity is what the value of the company is after the liabilities have been free from the assets. It is the retained earnings of the company. It is one of the parameters where investors can see if the company can grow exponentially within a time frame.
Income Statement
The income statement includes the income of the company within a time frame. Usually, investors want to see the income status of the company in three to four years. It provides the revenue and earnings of the company.
Revenue is the profit of the business which can be divided into two, operating and non operating. The operating revenue is what the company earns by giving its services to the customers. In contrast, non-operating revenue is the side profits of the company, like investments and rental income.
Expenses are what the company uses to keep the business running. It also includes the interests that the company needs to pay for its debts. Adding the two will give you the company’s total net income, which will, in turn, be a valuable piece for the investors or the financial capabilities of the company.
Cash Flow Statement
It is a numerical value in which it states how well the company generates cash to pay its debts, fund the operations and investments. It will tell the investors how the company generates money, where it comes from, and circulates.
It has three components, namely, operations, investments, and financial activities. The first one denotes the business’s operations, where the income is coming from, and how to spend it will all fall into this category. The investments are what the company invested into other things that can also generate income. And financial activities the cash from the investors and banks and the cash needed to pay them.
Benefits of Financial Statement
The above parameters of the financial statement can attract investors depending on the company’s financial capability and future. By letting them see that you are mobilizing the cash within the company, they will be interested in investing because they will see the opportunity to let their money grow. Remember, investors would want a company to be fully active instead of something stagnant.
Generally, the future of the company lies behind these documents. It dictates whether it will attract investors or not. The goal is to expand and have many sources of income to prevent bankruptcy if there will be a failure in some aspects. Liquidating the assets to small generating finances can help the company grow.
If you’re seeking to start a company, having a strategic plan with anticipated financial statements is the way to go. Whether you’re looking for investors to help you develop your company, they’ll probably want to look at your accounting records to see if it’s financially sound.
Nonetheless, all companies must take risks for it to grow. Playing safe and letting the company stagnate is not sufficient, especially with our growing economy.
