What You Need to Know About Financial Statements
We get a lot of questions about financial statements. And we love good questions! So, here’s a breakdown of the basics:
What are Financial Statements?
Financial statements record the financial activities of an entity. They’re formalized reports that measure your company’s financial performance and liquidity, which reveals the impact of your transactions.
Which financial statements do I need?
There are 3 primary financial statements that are vital for your business:
- Balance Sheet or Statement of Financial Position
- Income Statement or Profit & Loss Statement (P&L)
- Cash Flow Statement
What’s the difference between an Income Statement, Cash Flow Statement, and a Balance Sheet?
- An Income Statement (or P&L) showcases your net income. It’s a company’s revenue minus its expenses over a given period and uses prior periods as comparison.
- A Cash Flow Statement displays cash movement and demonstrates your ability to stay liquid, avoid debt, and invest where needed.
- A Balance Sheet provides the financial position of a company at a given date. It has three components that work in the following formula:
LIABILITY + OWNER’S EQUITY = ASSETS
- Liabilities are your debt, expenses (rent, utilities, etc.), and accounts payable (payroll, etc.)
- Owner’s Equity is what money would be left if all assets were sold and all debt was paid off
- Assets are cash, cash equivalents, accounts receivables, inventory, or tangible possessions (a building, company car, office equipment, etc.
What’s the purpose of financial statements?
These three Financial Statements exhibit your business’ overall performance. Together, they tell a story of what has happened and provide insight into what could happen in the future. With these three statements as our fuel, we can interpret your finances and discuss what might happen to them in the future.