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Business Advice

Unlock Financial Success Through Different Types Of Financial Reports

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How often do you step back from the day-to-day operations to look at your business’s health and financial performance? Some business owners do this monthly, some every quarter. Some are even keen enough to do this weekly!

Your financial reports provide a holistic view of a business’s health and can offer great opportunities for investors and creditors.

What vital financial reports should you look at as a small business owner? And what insights should each of the words be showing you?

The only way to eat an elephant is one bite at a time. The same could be said about completing and reviewing financial reports. Each statement looks at a separate aspect of the business.

Investors and creditors can also use financial reports to evaluate a company’s financial health and earning potential. No matter the dire circumstances, there may be hope in the future – if you have the big picture.

The 4 Most Common Financial Reports

 

1. Balance Sheet

A balance sheet is a financial statement that provides a snapshot of a company’s financial position and shows what the company owns, owes, and has invested in the business. This can also deliver the current value of a business for the period it covers.

The balance sheet outlines the following items:

  • Liquid assets – cash, certificates of deposit, short-term securities and treasury bills
  • Current assets –  accounts receivable, inventory, fixed assets and prepaid expenses
  • Current liabilities – short-term and long-term debt, accounts payable, payable wages and dividends, tax expenses and prepayments from clients
  • Shareholder and owner equity values – retained income, receivable dividends, capital gains and stocks

The balance sheet is essential because it shows whether a company has enough assets to cover its liabilities, a key indicator of financial stability. 

2. Income Statement

An income statement, also known as a profit and loss (P&L) statement, is arguably the most important financial report because it shows whether a company is making a profit or a loss. It provides insights into how much revenue is generated, the cost of goods sold, and the expenses incurred to run the business.

There are several critical elements in this document:

  • Operating revenue, which accounts for selling products or services
  • Net and gross revenues, including total sales revenue and remaining revenue after subtracting costs
  • Nonoperating income from accrued interest, investment returns, royalty payments, capital gains
  • Primary expenses, including cost of goods sold (COGS), depreciation and selling, general and administrative costs (SG&A)
  • Secondary expenses, like debt or loan interest, asset loss and capital loss

3. Cash Flow Statement

A cash flow statement (CFS) shows a company’s cash inflows and outflows over a specific period. The CFS is critical because it shows how much cash a company has to pay its bills and invest in the business. 

A positive cash flow indicates that a company generates more cash than it spends. In contrast, a negative cash flow means a company spends more money than it earns.

The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight into whether a company is financially stable. A business could display a profit in the Income Statement but have a negative cash flow. 

The cash flow statement typically comprises three key elements:

  • Operational activities – accounts receivable and payable, inventories, wages, income tax and cash receipts
  • Investment activities – the generation and use of investment earnings, asset sales, issued loans or credit and payments from acquisitions or mergers
  • Financing activities – stock repurchases, payable dividends, debt repayments and issuance, cash from investors and cash payments to shareholders.

4. Statement of Changes in Equity

A statement of changes in equity shows a company’s changes in equity over a specific period. The information on changes in equity is important because it shows how much money has been invested in the business and how much profit has been retained. Retained earnings are often used to either reinvest in the company or to pay off the business’s debt obligations. It also shows any dividends paid to shareholders and any changes in share capital.

Notes to the Financial Statements

Notes to the financial statements provide additional information about a company’s financial position and performance. The notes explain the accounting policies used to prepare the financial statements, give details on significant transactions, and disclose any contingencies or risks. The notes are important because they provide additional context and transparency to the financial statements.

Why Are Financial Reports Important?

Financial reports are essential because they provide insight into a company’s financial position and performance. They help business owners make informed decisions about allocating resources and planning for the future. Here are some reasons why financial reports are essential:

👉  Measure performance

Financial reports provide a benchmark for measuring a company’s performance over time. By comparing financial statements from different periods, business owners can identify trends and areas of improvement.

👉  Facilitate decision making

Financial reports provide insights into a company’s financial health, which can inform business decisions. For example, if a company generates much revenue but has high expenses, the business owner may reduce expenses to improve profitability.

👉  Evaluate financial stability

Financial reports show a company’s financial stability by providing information about assets, liabilities, and equity. 

👉  Comply with regulations

By preparing financial reports, businesses can ensure they are meeting their regulatory obligations.

Utilising Different Financial Reports

Financial reports are an essential tool for Australian businesses. They provide a snapshot of a company’s financial health and inform decision-making. 

If you’re a business owner with any uncertainty about your business performance, our specialist advisors and accountants can help. We can provide the snapshot you need to make informed decisions and manage your finances with future longevity in mind.

Reach out to us at coffs@cloutadvisory.com.au or call (02) 6650 5888.

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