How Important Are Financial Statements?

Tom Jeffries | April 21st, 2010

Although they’re not required for a closely-held business, financial statements can provide a crucial roadmap that helps management determine the financial health of the business and the steps to improve the return on investment for the owners – not to mention the fact that several entities outside your business may also request them.

There are four basic financial statements: balance sheet, income statement, cash flow statement and statement of shareholders equity. Do you know the difference?

Key Financial Statement Information

  • Balance sheet – This statement describes the financial condition of the organization at one given point in time, such as December 31. The balance sheet is comprised of assets, liabilities and shareholders equity.
  • Income statement – Designed to describe the organization’s results of operations over a specific period of time, it measures revenues earned and actual expenses incurred to arrive at a net income or loss figure.
  • Cash flow statement – Summarizing all changes in cash and financial position that have taken place during the period, the cash flow statement breaks down operating, financing and investing activities.
  • Statement of shareholders equity – This statement explains changes in earnings retained by the organization and capital contributed by the stockholders.

Financial statements allow business owners and managers to view their business through the eyes of an investor. Having current financial statements can help a business obtain financing from a lender, ensure a relationship with a vendor or supplier and also make a business more attractive to potential investors or buyers.

For all these reasons, professionally-prepared financial statements are a smart investment. However, you shouldn’t consider financial statements a one-time investment. The real value in using them comes from comparing a series of financial statements over a period of time, whether monthly or annually. By comparing your financial information on a regular basis, you’ll be better prepared to make the strategic decisions that will continue to help your business succeed.

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