Different Kinds of Financial Statements for Business Use

23/06/2021

One business tool that all small businesses require is a financial statement. When it comes to running their companies, business owners rely on the data presented in their financial statements that includes expenses, losses, profits, cash outputs and cash inputs and can indicate the overall health of the business.

All about financial statements

A full financial statement analysis can predict what the business is likely to undergo in the coming months. You can review this data to see how you can prepare the most important small business financial management activities like:

Weekly or monthly cash flow budgets
Profit forecast of the upcoming year
Losses incurred in the last year

Consolidated financial statements aid your predictive budget planning. These tools help you make informed decisions and calculate past data. Some of these financial tools report only the data of past/old business activity but small businesses work in the present. That is, all decisions to be made concern the immediate and medium-term future only.

A Financial statement is a combination of 3 main reports –
1) Cash Flow Statement
2) Balance Sheet and
3) Income Statement.

All of these statements mentioned are vital for SMBs, but we would also like to add a Profit Forecast to this list.

When combined, they can give you a clear idea of the financial health of your business. There are some other benefits as well:

Used for company evaluation by investors, lenders, creditors, employees and management.
Manage spending more accurately and know what you can afford.
It is easier when applying for business lending.
It is easier when attracting investment funds.
It is easier to identify new sales trends.
It is easier to identify issues in forecast revenue and resolve them early.

Types of financial statements

Now that you know all about financial statements and their benefits, it’s time to learn about the types. We have explained the 3 very basic financial statements of small companies here.

sell on amazon representation of products sold online

1) Balance Sheets

This is a simple type of financial statement that lists out all liabilities, shareholders' equity and company's assets. It is a snapshot of what your company has, and the shareholders' investments and debts it owes to lenders. You can look at this sheet to understand the health of your capital structure or when calculating rates of return.

Balance sheets are used with other core financial statements like the statement of cash flows, income statements, etc. for calculating financial ratios and other fundamental analysis.

Components of a balance sheet
Inside the balance sheet, you will find a list of the liabilities, owners'/stockholders' equity and assets. The assets are divided into:
1) Long-term obligations and
2) Short-term obligations.

Long term obligations include cash accounts like government securities, checking and money market. We have given a table to show what is added to balance sheets. At all times, assets should be equal to liabilities plus the owners' equity. It is denoted and calculated as:
Assets = Liabilities + Shareholders’ Equity

Determine Reporting Date and Period

Reporting Date is the last/final day of the reporting period.

When reporting on quarterly basis, the reporting date is the last date of that quarter:
Q1: March 31
Q2: June 30
Q3: September 30
Q4: December 31

Identify Assets

Current Assets:
1) Inventory
2) Cash/cash equivalents
3) Accounts receivable
4) Marketable securities (Short-Term)
5) Other CA

Current Assets:
1) Property
2) Intangible assets
3) Goodwill
4) Marketable securities (Long-Term)
5) Other NC assets

Identify Liabilities

Current Liabilities:
1) Accrued expenses
2) Accounts payable
3) Commercial papers
4) Current portion of debt (long-term)
5) Deferred revenue
6) Other CL

Non-Current Liabilities:
1) Deferred revenue (noncurrent)
2) Long-term debt
3) Long-term lease obligations
4) Other NC liabilities

Determine Shareholders' Equity

Shareholders’ Equity = Assets - Liabilities

1) Retained earnings
2) Common stock
3) Treasury stock
4) Preferred stock

Preparing a basic balance sheet:

After identifying all parts of your balance sheet, you have to move to the next step. This is adding Total Liabilities to Total Shareholders' Equity for Comparing Assets. In order to balance out the balance sheet, you need to compare assets against the total liabilities plus the equity. To get this amount right, you have to add the shareholders’ equity and the liabilities together.

There are many calculations to be made in the balance sheet. As a result, mistakes are made, and the balance sheet might not get balanced. It is a fact that the company’s assets must be equal to its liabilities plus any issued shareholders’ equity. Some reasons for an unbalanced sheet include:

Incorrect transactions entered
Misplaced or incomplete data
Currency exchange rate errors
Inventory errors
Equity calculations are wrong
Depreciation or loan amortization calculations are wrong

2) Income Statements

selling online representation of online store

The income statement is also called a profit and loss statement or statement of revenue and expense. It is used to show the revenues and expenses or financial performance of the company at a given time. This type of statement has 4 main benefits:

Gives full insight on the company’s operations.
Gives full insight on the company’s management efficiency.
Identifies all the under-performing sectors.
Benchmarks performance of the company relative to industry peers.

Your total revenues earned is the sum of the non-operating revenues and operating revenues. The total expenses include all the primary and secondary activities. Revenues are very different from receipts.

For example, you earn revenue and this amount is even reported on the income statement. Receipts are not shown on this statement. It only represents if cash has been accepted or paid out on various transactions. When calculating the amounts for the income statement, you use the formula:
Net Income = (Total Revenue + Gains) – (Total Expenses + Losses)

The final Net Income result is used for one more calculation called EPS (Earnings per share) that indicates your company’s profitability. This figure is calculated by dividing the total outstanding shares and the company’s net income.

Normally EPS is required by potential investors and market participants to know your company’s profitability before buying its shares. Business may also report the EPS amount adjusted for extraordinary items and for potential share dilution. The higher the EPS, the more profitable your business is. EPS is calculated as:

Earnings per Share =

Net Income-Preferred

End-of-Period Common Shares Outstanding

3) Cash Flow Statements

The CFS is a summary of all cash and cash equivalent amounts that exit and enter your business. It is used for measuring cash position of the company and cash generation to pay off debts and manage operating expenses.

The three types of cash flow activities when reading financial statements are:

Operational activities: This is the cash generated from the regular business activities, company's products and services. Items include income tax payments, interest payments, sales receipts, salary payments, and operations expenses.
Investment activities: This is the cash generated through the company's investments like asset sales, loans, and merger/acquisition payments, modifications in equipment, assets, or investments. It includes financial terms known as the Cash-In mode that refers to all asset divestments and Cash-Out mode that refers to all when buying new buildings, equipment, short-term assets.
Financing activities: This is the cash generated from banks, investors and cash used for shareholder payment, dividend payments, and stock repurchase. This Includes the Cash-In mode that refers to all capital that is raised and Cash-Out mode that refers to all dividends that are paid.

4) Various Financial Statement Ratios

Financial ratios are developed using the final interpretation of financial statements data; ratios are the end result of all the balance sheets, income and cash flow statements. Financial ratios can be calculated by individuals inside and outside of the company to get different understanding about the company:

Financial Ratio Use Type

Who Uses

Aim

Assessment Results

Internal User

Business owners, employees, management teams

Tracking performance of company

Profitability

Rates of return

Margins

External User

Creditors, retail investors, competitors, regulatory & tax authorities, financial analysts

Comparing company against competitors and industry peers

Company’s liquidity

Growth

Leverage

Valuation

Here are some commonly used financial ratios and their advantages:

FS Ratio

Formulas

Benefits

Inventory turnover ratio

Cost of goods sold ÷ average inventory or sales ÷ inventory

(Average inventory ÷ cost of goods sold) x 365

- Links performance of purchasing departments, warehouse and sales.
- Determines effective management of Inventory (Inbound).
- Determines effective management of Sales (Outbound).
- Links relation between Cost of Goods Sold, Average Inventories, and Net Sales

P/E ratio

PE ratio=(market value per share/earnings per share)

- Investors determine stock valuation
- Compare stock's valuation with industry group
- Determines future earnings growth

Current ratio

Current ratio=(Current Assets/Current Liabilities)

- Understanding how much cash reserves are available
- Understanding operating cycle efficiency
- Indicates ability to fulfil creditors obligations

Operating margin

Operating margin=(Operating Earnings/Revenue)

- Indicates financial stability
- Indicates ability to survive crisis
- Permits low pricing of products to compete

Debt-to-equity ratio

Debt to Equity=(Total Liabilities/Total Shareholders'Equity)

- Shows is financing is sourced from creditors or own reserves
- Indicates ability to fulfil creditors obligations

Working Capital

Working Capital = Current Assets – Current Liabilities

- Ensures liquidity
- Increases profitability
- Prevents operation obstacles
- Increases company's value

Now that you know how to create your own financial statements, see how you can be part of the online marketplace. There’s so much to know about selling online! Make your journey easier by registering on Amazon today.

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