Financial statements are used for many reasons by small business owners. Knowing which ones to use and what limitations those statements have can be confusing.
Financial statements provide you with an overview of the company’s status. Financial statements should show you measurements of the company’s financial position and assist you with making smarter business decisions.
Below is a brief overview of how small businesses could use the different types of financial statements.
What Kinds of Financial Statements do Small Businesses Use?
There are three types of Financial statements: cash flow statements, income statements, and balance sheets.
Cash Flow Statements
A cash flow statement shows how the company operates, invests, and finances the operations during a normal course of a year. There are four sections to a cash flow statement. There are four different sections to a cash flow statement:
- Cash flow from operations
- Cash flow from investments
- Cash flow from financing
- Total cash flow
The cash flow statement shows when your business is high or low on cash. This helps you with planning for future growth and avoiding potential risk. The statements include your operations what the business did for the year, Investment inflow, and financing what types of loans were received for the time.
Income Statements
Also known as profit and loss statements, they track information such as revenue, expenses, and gains and losses over a period of time. Here are some terms to assist in reading the statement.
Gross Profits: This is calculated from gross revenues subtracting the cost of goods sold. This may include direct labor raw materials and manufacturing overhead. It does not include indirect expenses.
Net Profits: This is also known as net income. This is calculated from gross revenues and subtracting the cost of goods sold, and expenses. You can also take the gross profit and subtract the remaining expenses.
After using the determining the above calculations, this determines the company’s net income or the income or loss that a company generated over a given time period.
Balance Sheets
The balance sheet shows your company’s net worth by clarifying the financial position. It contains three classifications of accounts from the general ledger: Assets, liabilities, and equity. Below are the definitions of these terms.
Assets – two main groupings of assets are cash or liquid assets such as cash or investments that can be converted into cash and non-liquid assets, assets that can not be converted quickly into cash equipment buildings real estate, and patents.
Liabilities: These accounts are what you owe. Current liabilities are due within a year. These include accounts payable credit cards, interest, sales tax, accrued payroll, payroll taxes, utilities, and rent. Long-term liabilities are due over one year, they include deferred taxes and long-term debt.
Equity: This is the last section of the balance sheet and consists of the difference of deducting liabilities from assets, equity remains. This can be distributed or kept in the business as retained earnings.
When completing a balance sheet your assets should equal your liabilities and equity or balance.
6 Common Financial Statement Calculations
Six common ratios or calculations can be used to calculate your company’s value.
Working Capital Ratio divides assets by liabilities also referred to as the current ratio. This is a measure of liquidity, or the business’s ability to meet its payment obligations.
Quick Ratio is determined by subtracting inventory from current liabilities, then divide that amount into liabilities. This is an indicator of a company’s short-term liquidity position and measures the ability to meet its short-term obligations with its most liquid assets.
Earnings per Share (EPS) measures net income on common stock. Divide income by the weighted average number of outstanding common shares. Negative earnings will not work with this ratio.
Price-Earnings (P/E) Ratio assesses future earnings. After determining the share price, divide that by the EPS to determine the ratio. This ratio will not work on negative earnings.
Debt-Equity Ratio is calculated by adding outstanding long-term and short-term debt, then divide that total by the shareholder’s equity book value.
Return on Equity (ROE) This ratio determines capital profitability by subtracting net earnings after taxes from preferred dividends, then divide this by the common equity dollars.
