A company’s financial statements provide important information about its financial health. Financial statements accurately reflect the business results and financial position of the enterprise. Moreover, it helps all stakeholders, including management, investors, securities analysts, etc., evaluate and make appropriate economic decisions by comparing past and present performance, thereby predicting future performance and growth of the company. Insights are provided by statements that provide standards and feedback that help the company make small adjustments and also determine the overall direction of the company.
Financial statements are useful in making decisions about expansion and funding. They are also included in marketing decisions, providing data that shows which aspects of the business provide the easiest return on investment. Laws or accounting standards require honest handling of the knowledge presented in the financial statements. Your company’s financial statements are important for senior executives to discuss past successes and future expectations.
By disclosing financial statements, management can communicate with external interested parties, such as investors, journalists, and industry analysts, about their business achievements.
FEATURES OF FINANCIAL STATEMENTS
- Financial statements must be suitable for the purpose they are prepared for. Unnecessary and misleading disclosure should be avoided, and anyone involved, and the material should be reported to the public.
- They must convey complete and accurate information about the company’s operations, status, progress, and prospects. It is also important that the preparers and presenters of the financial statements do not allow their personal biases to distort the facts.
- They should be easily comparable with previous reports or of comparable companies or industries. Comparability increases the usefulness of monetary statements.
- They should be prepared as classifications so that better and more meaningful analyses can be performed.
- Financial statements must be prepared and submitted on time. A reasonable preparation time will reduce these statements’ importance and usefulness.
- Financial statements must be generally acceptable, understandable, and accurate.
- The financial statements should be free from conflicts due to the accountant’s judgment and procedural choices.
- Financial statements must meet legal requirements regarding form, content, presentation, and preparation method.
WHY DO WE NEED FINANCIAL STATEMENTS?
MONITOR THE COMPANY’S FINANCIAL SITUATION
A company’s financial health is a serious concern for investors and creditors. As a source of funding for your company’s operations, investors and creditors believe financial statements measure their investments’ safety, liquidity, and profitability. Specifically, investors and creditors can find out where their money has gone and where it is currently.
MAKE AN INVESTMENT PLAN
Your financial record solves these problems by providing detailed information about investments in business assets. The filing also lists the debt and equity components of the company so that debt and equity investors can be better at understanding their relative positions in the company’s equity composition Company.
OPERATING INCOME STATEMENT
The financial terms on file are a snapshot of the company’s assets, liabilities, and equity at the beginning of the financial Reporting Format period; they do not disclose what happened in the number of transactions that caused the changes in financial conditions. Therefore, the performance results in the past also worried investors. The revenue budget report captures operating results such as revenue, expenses, and profit or loss. Using the income statement, investors can assess a company’s past earnings performance and the uncertainty of its cash flow management.
STREAMLINE CASH FLOW BETWEEN BUSINESSES
The importance of the Financial Statement Analysis is that it shows the exchange of money between companies and thus to the outside world over some time, after which investors can know if the company has enough cash. To buy costs and buy assets or not. Company earnings and sales reported in the income statement are often difficult to interpret and likely contain some non-cash items that do not provide direct information about the company’s cash exchanges throughout the amount. In addition, a company experiences cash inflows and outflows throughout other non-business activities, namely investing and financing. For investors, liquidity from all sources is not only accounting for income from operations but also what repays their investments.
ANALYSIS OF THE EQUITY SITUATION
The equity statement is especially important for equity investors because it shows changes in the various equity components, including retained earnings, over time. Time. The amount of equity can be the total assets of the company minus the total liabilities, representing the company’s net worth. The modest growth in the company’s equity through the acceleration of retained earnings, as opposed to the expansion of the shareholder base, means the accumulation of investment returns for existing shareholders.
6. ATTRACT INVESTMENT OPPORTUNITIES
In the investment world, cash is still king. Some investors may already be interested in your business because it is innovative, unique, or new. Investors may be willing to accept the risk; however, they will want empirical evidence that they will get their money back and more.
Financial statements will allow you to present the success and growth of your business in a way that investors appreciate. Financial statements also allow you to forecast expected earnings, which will help attract investors even if the business has some risk.
WHAT TYPES OF FINANCIAL STATEMENTS SHOULD MY BUSINESS KEEP?
There are generally three types of financial statements that small businesses should always remember to maintain and produce.
- Income statements – Income statements provide accurate information about a company’s earning potential for a specific period, quarterly or monthly. Reports allow company management and third parties to know exactly where the company’s money is being earned and spent.
- Cash Flow Statement – A cash flow statement is a document that uses data generated from financial statements, balances, and income, to show a company’s financial progress over time. Time. Reports provide insight into whether a business is profitable and whether profits increase or decrease over time. Cash flow statements are prepared annually, but a company must prepare them at any time to see up-to-date information on the company’s financial position.
- Balance sheet – the balance sheet represents a business’s value at a certain point in time. It considers a company’s financial assets, liabilities, equity, and capital to declare how much it owes and owns.
DO I HAVE TO KEEP RECEIPTS?
Incoming and outgoing financial transactions between the company and third parties must be kept. If invoices are not presented for business transactions, it won’t be easy to prepare accurate financial statements and maintain accounting activities and books of accounts. Therefore, always make sure that your business has financial statements that record all transactions, even for small purchases made for the business.