Why Do Financial Statements Matter for Your Business?
When addressing financial matters, many well-meaning entrepreneurs focus solely on whether their business has been maintaining a steady profit margin. While this is important and a good starting point, too much emphasis on profits alone can cause business owners to lose sight of their organization’s comprehensive financial standing.
This bigger picture diagnosis can be achieved with the help of a financial advisor, such as a CFO. Professional help — whether in-house or outsourced — gives small business owners an insider’s perspective into the cash flow that governs their entire operation. One of the most essential financial reporting measures that helps businesses and their associates know where their money comes from, where it is now, and where it’s headed is keeping track of monthly and annual financial statements.
This article will delve into these statements, their individual purposes, and how each contributes to both short- and long-term business success when handled correctly.
The four types of financial statements
Procuring and safeguarding necessary financial documents will clue you into the overall health of your business. However, no one document will be able to tell you everything you need to know about your finances. It’s important to cover all your bases to gain a well-rounded understanding. Here are the four core financial statements that every business should have on hand:
- Balance Sheets
Think of a balance sheet as a report card detailing your business’s accounts at a glance. Each balance statement includes information about the assets, liabilities, and equity that your company currently has under its belt. As it helps identify best financial practices at any given time, the balance statement is an essential budgeting tool.
- Income statements
In order to identify financial trends across balance statements over a longer period of time, businesses look at their income statements. This document contains information about revenue and profits as well as expenses and losses to predict the future state of your business accounts should operations continue as usual — so they are an excellent risk management tool.
- Cash flow statements
While expense and profit estimations procured by other statements on this list also factor in other elements — like goodwill write-offs — cash flow statements only report the inflows and outflows of capital towards operations and investments. They offer a clear picture of the actual financial health of an organization.
- Equity statements
Finally, equity statements report a business’s retained earnings, or capital, held within the organization (and not distributed to shareholders or other investors). This tool helps clarify that a business has been able to run on its own profits without the additional contribution of other accounts. Equity statements also offer support when campaigning toward future investors.
These statements are typically acquired and handled by a business’s accounting and finance department.
How does collecting financial statements benefit your business?
Business owners who have enlisted the help of a trusted CFO can rest assured that their information is being handled according to Generally Accepted Accounting Principles (GAAPs) and with the business’s goals in mind. However, the long-term financial health of any business is significantly improved when the CEO has consulted their financial team and can see their cash flow with more clarity. Here are the benefits that business owners enjoy when they work with a CFO who truly understands their financial statements:
Gain financial confidence as a CEO
By maintaining a consistent survey of how revenues are utilized towards current expenses and future investments, business owners can remain confident in their abilities as responsible leaders and innovators. Since financial health impacts every department of an organization in clear, accountable ways, CEOs can ensure staff that finances are being put to good use each quarter.
Make sound decisions as a business owner
Having a firm understanding of a business’s financial state is essential to making solid decisions about its future. With clear, accessible evidence of cash inflows, outflows, and retained earnings, CEOs will know the best times to institute process changes, invest in new growth opportunities, and take other risks that may impact the company’s finances.
Increase credibility with commercial partners
A detailed record of your company’s financial history — available at any time upon request to the resident financial manager — will become necessary in interactions with potential funders. For example, new stakeholders consider a business’s equity when deciding whether to trust them on credit as a potential business partner. Similarly, banks are willing to lend to companies that show an established history of good financial standing.
Secure your business’s financial future
When it comes time to pass on leadership roles, a clear statement about the business’s financial health under current leadership can help inform decisions about staffing changes. A CFO can assess past financial performance to determine the impact of any future personnel changes.
Reliable financial advice and planning for your small business
Whether you’re an entrepreneur organizing your financial statements for the first time or an experienced business owner who wants to broaden their cash flow perspective, Chesapeake Growth Network is here to help. Our certified CPAs are a premier source for financial guidance in a wide variety of industries and will ensure that your business remains in compliance with federal and state regulations. Increase your financial literacy with a partner you can trust.
Contact Chesapeake Growth Network through our website to connect with an accounting, financial, or legal professional who can answer your specific questions and concerns. Stay in the know by subscribing to our newsletter and keeping an eye out for our next article in this series, where we’ll explore ways to understand and pay for long-term care.