Understanding Financial Statements

Colleagues looking over company financial statements

While small businesses are the heart of the Canadian economy, financial health is the lifeblood of every business. So preparing financial statements is vital for properly diagnosing your business’s performance and future health.

Just as you would see a doctor to diagnose or treat your physical ailments, so should you have a small business accountant calculate financial statements and provide you with essential, valuable insights into different aspects of your business’s financial performance, allowing you to make informed decisions and improve your profitability and long-term success while giving you the time to focus on profitable business tasks.

In this post, you’ll gain a better understanding of the 10 most important financial statements and learn of their importance for your success.

Income Statement

An income statement is a summary of a business’s revenues, expenses and net income over a specific period. The income statement provides insights into the business’s financial performance by comparing revenue earned to the costs incurred in generating that revenue. It helps small business owners understand the profitability of their operations.

An income statement includes operating expenses, such as salaries and rent, as well as non-operating income, such as interest income. By tracking income and expenses, businesses can identify areas where they can reduce costs and increase revenue to improve profitability.

Balance Sheet

A company’s financial situation at a given moment can be seen in a balance sheet. It consists of property, liabilities and assets. Assets include money, receivables, stock, real estate, machines and equipment.

The balance sheet aids small business owners in understanding their available resources for meeting responsibilities, such as settling debts and loans, as well as showing the worth of their company to potential investors. Accounts payable loans and other obligations are examples of liabilities. The business owner’s capital is included in a business’s equity.

Cash Flow Statement

This financial statement illustrates the amount of cash inputs and withdrawals over a given time frame. A cash flow statement is a prime example of the importance of business accounting. It aids in the understanding of small business owners’ liquidity and capacity to produce funds to fulfill their financial obligations.

Operating activities, investing activities and financing activities are the three groups into which the revenue inflows and outflows are categorized in the cash flow summary.

Cash inflows and withdrawals from operating activities are those pertaining to the company’s regular operations, such as sales and expenditures. Cash inflows and withdrawals related to funding the company, such as borrowing money or paying dividends, are included in financing operations. Cash inflows and withdrawals associated with investments, like purchasing and selling machinery, are referred to as investing activities.

A business owner trying to understand her financial statements

Accounts Receivable Aging Report

The amount and duration of client debt owed to the business are shown in this report. Small business owners can better grasp their cash flow and spot any possible collection problems thanks to the accounts receivable aging report.

The report divides unpaid bills into groups according to how long they have been unpaid—for example, 30 days, 60 days, or 90 days or more. Businesses can find slow-paying customers and take action to recover past-due payments by analyzing this data, such as applying late fees or offering early payment discounts.

Accounts Payable Aging Report

An accounts payable aging report details the amount owed to wholesalers and distributors by the company, as well as how long it has been past due. It aids in the management of expenditures and the understanding of financial flow for small business owners.

The accounts payable aging report categorizes outstanding bills by the number of days they have been outstanding. By analyzing this report, businesses can spot vendors who take a long time to produce products or services and bargain for more favourable payment terms.

Budget vs. Actuals Report

This report contrasts the company’s real and budgeted financial results. It assists proprietors of small businesses in locating potential areas of excess or underperformance. The report emphasizes any discrepancies between real income and expenditures and the budgeted amounts. Businesses can determine areas where they need to reduce expenses or boost income in order to achieve their financial objectives by assessing a budget v. actuals report.

Statement of Changes in Equity

The statement of changes in equity financial statement shows how the business’s equity has changed over a specific period. It helps small business owners understand the impact of their business activities on their equity.

This statement includes information about the business owner’s investment in the business, net income or loss, and any dividends paid. It enables businesses to identify how their actions, such as issuing new shares or paying dividends, affect their equity.