Running a business can be overwhelming. Entrepreneurs are habitual of playing different roles across their business, let it be a CEO, CTO, or a marketing representative. However, more often than not, they ignore the financial aspect of their business, and they are not to blame for it. Financial statements can be quite intimidating, especially if you don’t have a background in finance.
We have put together this small guide to help you make sense out of your four most critical financial statements: income statement, balance sheet, statement of cash flows, and statement of retained earnings.
The income statement of your business provides a clear view of the real-time financial health of your firm. How much revenue are you bringing in and how much money is going out over a specified period. It’s quite common to call it a profit and loss statement.
The income statement of your business includes:
- Revenue: Your income statement takes into account revenue from different sources, both primary and secondary, for a given period. It includes your earned income from sales or services, rental income, or income received from the sale of an equipment and interest income.
- Expenses: The expense section involves any business-related expenses (payroll, raw material, or third-party services), any business losses, and depreciation of assets during the assessment period.
- Profit or loss calculations: The entire purpose of an income statement is to indicate whether your business was profitable or incurred losses during the assessment period. It also reflects whether the income is retained by your firm or distributed as dividends among different firm owners, partners, and investors.
If you’re to raise funds for your startup or even a mature business, your balance sheet will be the first piece of information prospects will require.
The balance sheet of your business reflects the financial position of your business during a given period. Some critical components of the balance sheet include your assets, financial liabilities, your equity position, and any investments put forth in the business. Your balance sheet also indicates asset depreciation since the date of purchase of the asset.
Statement of Cash Flows
You are running a profitable business, your income statement looks impressive, and your balance sheet reflects how well you’re running the business. However, for some reason, you’re always in need of extra cash. Why is it so?
Your cash flow is to blame. The statement of cash flows helps you identify the actual cash position of your business instead of accrual accounting status. It reflects the cash your firm received from the customers in any given period. Your statement of cash flows also provides insights into the exchange of cash within different categories, such as revenue, assets, expenses, liability, or equity accounts.
Statement of Retained Earnings
The state of retained earnings reflects how much of your earned profits stay with your firm and how much is distributed across different investors, owners during the assessment period. While the statement of retained earnings isn’t as critical as other statements in your daily operations, your lenders and investors will pay special attention to it. It indicates how you use your business earnings. Are you reinvesting in your business? What percentage of your profits are distributed among investors?
Binery: Your Bookkeeping Partner for Sustained Growth
By now, you must understand how challenging it could be to keep up with these financial statements. Binery is an innovative accounting service that helps you track the financial health of your business within a single platform, connecting to all the financial tools you use to operate your business. This ranges from your bank to payroll provider to point of sale systems, we could integrate these tools with our software and offer it as a service to you. Our goal is to let you focus on what you do best, grow your business, and let us take care of your bookkeeping responsibilities. No more emailing Excels and PDFs back and forth. It is all automated now.
Reach out to us to see we can help you out. We’ll be more than happy to answer your queries.