Every business knows that reporting your company’s financial position is an obligation, but why are financial statements important? Essentially, your company’s financial statements provide insight into the business’s financial health and report critical information about performance, cash flow, and operations.
These statements are of great importance to all stakeholders in a business, from investors to employees, as they provide a snapshot of the company’s financial position with concrete information about expenses, profitability, and debt.
The Importance of Financial Statements to All the Stakeholders in a Business
Financial statements provide information about your company’s business activities and financial performance for the period covered. Having insight into a company’s performance is important for all the stakeholders in a company. While the same statements might be provided to each stakeholder, different people will need this information for different reasons:
Management
Management uses financial statements to run the company or a specific department of the company more effectively. Financial statements will be used as a basis for:
1) Forecasting
Managers use forecasts to make estimations about performance, gauge cash flow, and make decisions regarding inventory and staffing. Forecasts also help inform marketing and sales departments about when to expect spikes and lulls in demand. Forecasting is an essential tool for management as it informs managerial decisions at all levels in a company.
2) Planning
Planning the budget for the following year is only possible after analyzing the financial statements from the previous year. Management will then decide which assets to acquire or sell to maximize profitability.
3) Control
Knowing where you stand financially—for good or for bad—is essential for making informed business decisions. Reviewing balance sheets and income statements in particular can help businesses work out the steps that are needed to achieve their short and long-term goals.
4) Profit Planning
Also known as income statement forecasting, profit planning involves working out how much revenue your business will generate. With this information, you can decide how much money to allocate to each aspect of the business.
5) Analysis
Managers will use data to compare performance from one year to the next, across different departments, or in reference to industry averages. This will allow them to understand their company’s performance and pinpoint any areas of concern.
6) Cash Budgeting
Cash budgeting involves creating budgets by estimating income and expenses for a period in the future. This gives managers more of an idea about cash flow.
Shareholders
Shareholders with equity in your company will be interested in your financial statements as they provide information about revenue, expenses, and profitability.
Shareholders will use this and additional data such as the company’s debt load and its ability to meet its short and long-term financial obligations to assess the company’s financial performance and help them make strategic decisions for the future.
Creditors
If you are asking for help from a creditor to expand your business or make the necessary investments needed to grow your business, they will want to know exactly where you stand financially. Creditors will go through your financial statements and evaluate whether your company is in a position to repay the debt.
The Government
Business-related policymaking depends largely on financial statements. This is because financial statements reflect the performance of companies in general. Governments can then use the information they gather to set regulatory and taxation policies.
Please note: Businesses must keep financial records to support the information on their tax returns. Being found without the necessary documents to substantiate a business expense could result in losing the corresponding deduction and being charged penalties and interest on the amount.
Employees
Employees are essential to every business as their performance is key to business growth. Financial statements can help employees understand their company’s financial position and how their roles fit into the bigger picture.
Financial statements that show long-term stability will help employees feel secure in their jobs and have confidence in the management of their company and the direction in which the company is going. Sound financial reporting will also create a transparent environment in which managers and employees can cooperate during difficult times.
Ensure Accurate Financial Statements
Knowing how important financial statements are to all the stakeholders in a business, it’s essential to make sure your financial statements are prepared correctly and in a timely manner.
Outsourcing financial statement preparation services is a great way to make sure your financial information is in order, that you remain compliant with recordkeeping regulations, and that all of your company’s stakeholders have the information they need to make strong financial decisions going forward.
What the Different Financial Statements Tell You
There are several different types of financial statements. Each one is used to gain specific insights into the business’s operations that can be used as a basis for making important decisions.
Income Statement
The income statement is used to report:
- revenue generated from sales
- operating expenses involved in generating revenue
- other costs like taxes or interest expense on debt
Ultimately, the income statement reports your company’s net income or profit for the reported period. This is calculated by subtracting the costs involved in doing business from your revenue.
Balance Sheet
A balance sheet shows a company’s:
- Assets: what the company owns
- Liabilities: what the company owes
- Stockholders’ equity: the assets that are available to shareholders after all of the company’s liabilities are paid
Cash Flow Statement
The cash flow statement shows the cash inflows and outflows of a business during a given period. This includes the sum of all transactions added to or taken away from the business’s available funds. Your cash flow statement will help you manage liquidity and understand how decisions like your investments and operational or financing activities affect your cash flows.
Cash flow is important to every company as it indicates how much cash is available firstly to meet your short-term obligations and then how much is left over to invest in the company or pay dividends to shareholders.
Custom Reports
Some businesses may have very specific financial reporting needs, such as needing project-specific rather than company-wide reports. In this case, you may need to ask an accounting professional to create a custom report.
Give Your Business a Financial Health Check-Up
Financial statements reveal the health of your company and give you a clearer understanding of where you are and the decisions that need to be made. A financial health check-up is often what a business needs to expand, keep growing, or get back on track during challenging times.
Outsourcing financial statement preparation to a reliable and trustworthy professional helps to ensure the accuracy and prompt preparation of key financial statements. Financial statement preparation services typically include income statements, balance sheets, cash flow statements, and any custom reports your business needs to get where it needs to be.
