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Financial reporting is the key important concept in summarizing your financial data. It reveals what you’ve done, right or wrong, and shows where your company is headed. Financial reports allow you to analyze your business to determine its proper course of action. From its information you’ll be able to create projections and what-if scenarios, calculate ratios, budget and forecast data. When compiled properly, the data within is a powerful tool for managing your company. Let’s look at some specifics of financial reporting.
THE BASIC STATEMENTS
Listed are the most commonly used statements and their key elements.
Balance Sheet- this statement is generally referred to as the “Statement of Financial Position”. It reflects the position of a company on a specified date and is comprised of Assets, Liabilities, Owner’s Equity (Capital). Assets reflect ownership of tangible and intangible items. Liabilities reflect amounts that are owed to creditors. Owner’s Equity or Capital Accounts reflect the owner’s investment in the company. It includes owner’s contributions, withdrawals, and accumulated net profits in the business
Income Statement- Also referred to as the “Profit and Loss Statement” reflects all the income and expenses incurred for a specified period of time. It calculates the net ending result for the period, whether it’s a profit (positive ending balance) or loss (negative ending balance).
Cash flow – this statement reflects the flow of cash for a period of time. It reveals where the cash comes from, who it will be paid to, and when it will be paid out. This is one of the key statements used in the budgeting process.
Statement of Owner’s Equity – this statement summarizes the activity that occurred in the Owner’s Capital section of the balance sheet, which was mentioned earlier. Changes to this account involve owner’s investments, withdrawals, and net change to operations or net profit or loss.
WHO USES THESE STATEMENTS
Banks and financial institutions – when your company needs capital (money) for expansion or for daily operations, requests for loans or lines of credit are made through banks and other financial institutions. These potential lenders are interested in your company’s ability to make timely payments of principal and interest on loans due. Their decision to lend or not to lend is dependent upon the analysis of the information in your financial statements. Essentially it must be determined that the expected debt does not exceed your expected receivables.
Creditors/Suppliers – purchasing supplies and materials is not always done on a cash basis. Dependent upon your credit standing and payment history, your suppliers may allow you to purchase on account, or on credit. Suppliers may ask for your company statements to help them in their decision making process.
Investors – when the time comes that you are looking to expand your operations, but don’t have the necessary funding to do so, another alternative is to turn to investors. Investors will want to know if your company’s financial position is viable. In other words, what’s the potential for profit? A sound well defined business plan with financial projections will reveal the expected potential success.
DON’T TRY THIS AT HOME UNLESS YOU’RE A BOOKKEEPER
With all the pertinent and sensitive information contained in these statements, it’s extremely important that they are accurate. But how do we know this? The typical small business person(s) become very confused with the input and output of data that’s needed to be reflected in these statements. Some may go as far as to educate themselves on basic accounting principles, while others will rely solely on their software program to organize it for them. As I always say, “NO, UNLESS YOU KNOW”. Posting entries without a good understanding of accounting will subject your company to many bookkeeping errors. Not knowing the ins and outs of entries can be more trouble than it’s worth. You will end up spending unnecessary time to correct them, which in the long run, will cost you valuable man hours. Do yourself the favor, if you have any doubts about posting bookkeeping entries, ask the experts, or outsource this function completely so you won’t have to worry about it.
Knowledge is power. Having a basic understanding of bookkeeping entries will give you the confidence needed to be able to ask the right questions when dealing with your statements.
Here’s to your knowing!
Jacqueline Ford
Financial Strategist
THE BASIC STATEMENTS
Listed are the most commonly used statements and their key elements.
Balance Sheet- this statement is generally referred to as the “Statement of Financial Position”. It reflects the position of a company on a specified date and is comprised of Assets, Liabilities, Owner’s Equity (Capital). Assets reflect ownership of tangible and intangible items. Liabilities reflect amounts that are owed to creditors. Owner’s Equity or Capital Accounts reflect the owner’s investment in the company. It includes owner’s contributions, withdrawals, and accumulated net profits in the business
Income Statement- Also referred to as the “Profit and Loss Statement” reflects all the income and expenses incurred for a specified period of time. It calculates the net ending result for the period, whether it’s a profit (positive ending balance) or loss (negative ending balance).
Cash flow – this statement reflects the flow of cash for a period of time. It reveals where the cash comes from, who it will be paid to, and when it will be paid out. This is one of the key statements used in the budgeting process.
Statement of Owner’s Equity – this statement summarizes the activity that occurred in the Owner’s Capital section of the balance sheet, which was mentioned earlier. Changes to this account involve owner’s investments, withdrawals, and net change to operations or net profit or loss.
WHO USES THESE STATEMENTS
Banks and financial institutions – when your company needs capital (money) for expansion or for daily operations, requests for loans or lines of credit are made through banks and other financial institutions. These potential lenders are interested in your company’s ability to make timely payments of principal and interest on loans due. Their decision to lend or not to lend is dependent upon the analysis of the information in your financial statements. Essentially it must be determined that the expected debt does not exceed your expected receivables.
Creditors/Suppliers – purchasing supplies and materials is not always done on a cash basis. Dependent upon your credit standing and payment history, your suppliers may allow you to purchase on account, or on credit. Suppliers may ask for your company statements to help them in their decision making process.
Investors – when the time comes that you are looking to expand your operations, but don’t have the necessary funding to do so, another alternative is to turn to investors. Investors will want to know if your company’s financial position is viable. In other words, what’s the potential for profit? A sound well defined business plan with financial projections will reveal the expected potential success.
DON’T TRY THIS AT HOME UNLESS YOU’RE A BOOKKEEPER
With all the pertinent and sensitive information contained in these statements, it’s extremely important that they are accurate. But how do we know this? The typical small business person(s) become very confused with the input and output of data that’s needed to be reflected in these statements. Some may go as far as to educate themselves on basic accounting principles, while others will rely solely on their software program to organize it for them. As I always say, “NO, UNLESS YOU KNOW”. Posting entries without a good understanding of accounting will subject your company to many bookkeeping errors. Not knowing the ins and outs of entries can be more trouble than it’s worth. You will end up spending unnecessary time to correct them, which in the long run, will cost you valuable man hours. Do yourself the favor, if you have any doubts about posting bookkeeping entries, ask the experts, or outsource this function completely so you won’t have to worry about it.
Knowledge is power. Having a basic understanding of bookkeeping entries will give you the confidence needed to be able to ask the right questions when dealing with your statements.
Here’s to your knowing!
Jacqueline Ford
Financial Strategist