The Most Important Financial Statements Every Business Owner Should Know
If you own a business, an easy way to get an accurate picture of your business is to run key financial reports. However if the data in the report is wrong, you can make inaccurate decisions. Knowing which reports are the most important financial statements can save you valuable time and money.
Why are Financial Reports Important to Business Owners and Stakeholders?
There are several reasons why key financial reports are important to a business.
- Transparency. Financial reports give an overview of your business’s profits/losses for both owners and shareholders. Reports also show investors how financially healthy a company is and if it is a good investment opportunity. Transparency in business records is something shareholders like to see since it makes them feel like they can trust a company.
- Spending Trends. Reports let owners know their spending trends and where losses occur so they can adjust business tactics. Seeing these trends can help an owner or financial department create an accurate budget.
- Accuracy. Another reason financial reporting is important is that reports can check if financials are accurate. Reports can help your financial team catch mistakes and fix them in a timely manner. If there is an inaccuracy in financials, having the correct information and reports on hand can save time and money.
8 Most Important Financial Statements
Depending on your accounting system, there are several different kinds of reports available. It can be overwhelming what each report means and how they will impact your business. Knowing the differences between them can help you make an informed decision on which reports will benefit your company.
1. Balance Sheet
A balance sheet is a financial statement that reports on a company’s assets, liabilities, and shareholder equity. The balance sheet is one of the three core financial statements used when evaluating a business.
How does it impact a business?
It provides a snapshot of a company’s finances and debts as of that moment. The balance sheet adheres to a formula that compares assets with the sum of liabilities and shareholder equity. Fundamental analysts use balance sheets to calculate these financial ratios.
2. Statement of Stockholders’ Equity
A statement of stockholders’ equity, also known as a statement of shareholders’ equity, is a section of a balance sheet. It shows the difference between total assets and total liabilities and is usually measured monthly, quarterly, or annually.
How does it impact a business?
It gives the owner, investors, or shareholders a picture of how a business is performing and a total net of all assets and liabilities. This report can be used to attract investors or shareholders to a company.
3. Income Statements
Another of the three core financial statements is an income statement. It reports a company’s financial performance over a specific accounting period.
The formula for an income statement is: Net Income = (Total Revenue + Gains) – (Total Expenses + Losses).
Total revenue is the combined amount of both operating and non-operating revenue, while total expenses include those incurred by primary and secondary activities.
Revenue is not the same as receipts. Revenue is what a company earns and is reported on the income statement. Receipts, whether it is cash received or paid out, are not.
How does it impact a business?
An income statement provides a view into a company’s operations, how efficient its managers are, if there are any underperforming sectors, and its performance compared against industry peers.
4. Cash Flow Statement
The final core financial state is a cash flow statement. A cash flow statement summarizes the amount of cash, and cash equivalents, entering and leaving a company in a specific time period.
How does it impact a business?
A cash flow statement (CFS) highlights a company’s cash management, including how well it generates profit. This financial statement works in cooperation with the balance sheet and the income statement to show how much a company is spending.
The main components of the CFS are cash from three areas:
- investing activities
- financing activities
- operating activities
The two methods of calculating cash flow are:
- Direct method adds up all cash payments and receipts.
- Indirect method calculates cash flow by adding and/or subtracting differences resulting from non-cash transactions.
5. Statement of Equity
An equity statement is a financial piece that a company is required to prepare at the end of a reporting period, along with other financial documents. It can also be referred to as a statement of owner’s equity or a statement of changes in equity. In the United States, it can also be called the statement of retained earnings.
How does it impact a business?
The statement of owner’s equity reports the changes in company equity, including earned profits, inflow of equity, dividends, withdrawal of equity, and net loss. In essence, it tracks any changes in equity.
It can let lenders know if a company can pay back a loan if they request one. It shows an owner where their spending trends are and if they are overspending/underspending in different areas.
6. Cash Management Report
Cash management is the process of collecting and managing cash flows for a company or an individual.
How does it impact a business?
A cash flow statement shows how much cash a company has readily available and the company’s health. It also lets a company know how much money they have to spend on hand at a given time.
7. KPI Reports (Key Performance Indicators)
A Key Performance Indicator (KPI) report is a set of measurable goals to show a company’s overall long-term health. They provide a clear and accurate picture of an organization’s performance, well-being, and potential for growth.
These indicators can vary not only from business to business but vary depending on your industry. However using this type of reporting helps your management identify potential opportunities and challenges early, to evaluate the success of their strategies.
How do they impact a business?
Since there are several different KPIs, a company should customize reports to show the ones most useful for them. By only showing the relevant reporting, the information is easier to read. They can show potential investors where investments are needed. If a company is trying to decide which strategy to use, it can use a KPI to show how each option will potentially perform.
8. Dashboard Reports
Dashboard reporting helps visualize KPIs and track performance. The reporting pulls in data from multiple sources to give a complete picture of a business. The most effective dashboards also integrate recommendations from AI and embedded visualizations.
How do they impact a business?
Since they give a complete picture of a company, dashboard reports help a company make accurate decisions. They are also an effective tool for shareholders since they have visual representations of the data and are easier to read.
Working with a Powered by Centri Expert
Monthly financial reports are essential for a company’s growth. These documents provide a calculated view of your company’s success and can help you forecast and plan for future growth.
Working with an expert from Powered by Centri will learn about your business and help you research different key financial reports. They will make sure you get the correct systems in place and monitor your reporting to make sure it goes smoothly.
Knowing the different financial reports and when to use them is essential for your business. Working with an expert from Powered By Centri ensures your data is being gathered and measured accurately.
