Financial reports assist both internal and external stakeholders in understanding the financial position of the company. When requesting bank loans, venture capital financing, or equity funding; small and medium firms may need to produce financial statements to shareholders at some point.
The balance sheet, income statement (sometimes known as the profit and loss statement), and cash flow statement; are always included in financial reporting for small and medium businesses.
Important Financial Statements
1. Balance Sheet
The balance sheet is a picture of a company’s overall health—what it owns, what it owes, and how much equity it has. On the balance sheet, assets are stated first, next liabilities then equity. In accounting, the balance sheet is entirely based on historical costs. The assets are presented in order of how quickly they may be turned into cash.
So first we have Current Assets (assets of an organisation that are likely to be sold or utilised in the coming year). Then cash accounts receivables which means money owed by customers for purchases made on credit; then inventory (list of goods). Next is non-current assets (company’s long-term investments); Under which we add building, land, Computer and Depreciation (a total reduction of an asset’s cost over its useful life); and it is subtracted into the total non-current assets.
On the liabilities side under Current Liabilities, we add Accounts payable which means the outstanding amount which needs to be paid; payroll(salary) and line of credit like loans. Under Non-Current Liabilities, add long term debt (amount of outstanding debt a company holds that has a maturity of 12 months or longer).
In Equity, we add capital (money available to start a business); and retained earnings (amount of profit a company has left over after paying all its direct & indirect costs, income taxes and dividends to shareholders).
2. Income Statement (Profit & Loss Statement)
The income statement shows investors the company’s profit or loss during a certain reporting period; by breaking down revenue, cost of revenue, operating and non-operating expenditures, and non-operating income. Keep in mind that the income statement excludes any loan payments or asset acquisitions. It is perhaps the easiest report to analyse. The company begins with all the money it earned during that reporting period; which is Net sales (Gross sales – Returns and allowance) and then calculate COGS (Cost of goods sold); which is basically purchases, indirect expenses, and labour. Net sales subtracting COGS will give Gross profit. Then we get Operating income by subtracting total expense from gross profit.
Any interest, non-operating income or expenses are then added or subtracted from the operating profit to arrive at operating profit before income tax. After subtracting income tax from the amount, we get Net income.
3. Cash Flow Statement
Small and medium companies have traditionally struggled with cash flow, and the epidemic has just worsened the situation. It’s difficult to keep track of cash inflows and outflows and compare them monthly or quarterly to keep cash flow constant. Because it shows changes over time and the net increase or decrease of that accounting period. The cash flow statement supports the information from the income statement and the balance sheet to make the financial position of the firm evident. Operating activities, investment activities, and financing activities are the three cash buckets that cash flow statements split and analyse. This statement also shows how much money was distributed to investors or owners as dividends.
We begin with mentioning the opening balance of the year, then operating activities which will include net income, depreciation, amortisation, current and noncurrent assets and liabilities and others. Subtracting accounts receivables and inventories. Next, we will have Investing Activities, where the purchase of securities and payments are subtracted (because money is going out) from the sale of securities. Last, we have financing activities where dividends and repurchase of stock are subtracted from long term debt. Which gives us how much cash is remaining at the end of the year.
There is an interrelation of information in each of the three important financial statements for small and medium businesses- the Balance Sheet, Income Statement, and Cash Flow Statement. Though there are multiple financial statements these three help business owners and shareholders understand the financial position of the business. There are financial reporting software like NetSuite, Workvia or sage intacct software that are designed to help users perform financial and accounting tasks.