How to Prepare Financial Statements for Your Business

The precision with which prepares financial statements define the profitability of a business and the subsequent decisions to be made in the near future. These sophisticated documents give a summary of how a company is managed and enable the investors, stakeholders, and authorities make proper evaluations and decisions. This guide focuses on the formulation of three important financial statements: the Balance Sheet, Income Statement, and Cash Flow Statement.

Prepare Financial Statements for Your Business

To prepare a Balance Sheet, business owners must ensure the overall operational efficiency of the organization is at an optimal level. These statements comprehensively provide the position of a business in terms of profitability and productivity. Through proper financial statement composition, legal compliance is guaranteed while stakeholder decisions are effectively and strategically made. The accuracy in the financial statements relies on the classification and recording of transactions. Standard accounting principles have to be followed in the business in order to increase credibility. Having organized financial papers reduce or eliminates the need of undergoing fraud audits and will serve as sources for financial intention in the future. The use of automated accounting systems makes it possible to capture information without mistakes or having to spend too much effort and money. The ease of tracking the company’s development is directly proportional to the frequency of updating statements.

Gathering Financial Information

In this subsection, we’ll focus on the first and most crucial step toward preparing any financial statement. One of the prerequisites is to ensure that all information is sorted and organized accordingly.

• Accurate Record-Keeping: You should take care of every detail of each business deal. These include invoices, dispensed receipts, the bank statements and even the payments made.

• Employing Accounting Essentials: Operating cashflow management software such as Invoiv aids in the seamless organization of financial information.

• Combining Business and Personal Finances Together: Whether it is an individual or business, maintaining these separately provides a straightforward approach to financial reporting and compliance.

• Keeping Copies of Tax Returns: Copies of filed tax returns are invaluable for audit purposes as well as future financial advances.

Comprehending the Important Financial Statements

There is no question that every financial statement captures a business’s status and what is going on from a financial perspective uniquely.

Balance Sheet

Illustrates the financial standing of a business at a set time in its life cycle detailing its assets, liabilities, and equity.

• Assets: Cash, accounts receivable, inventory, and fixed assets in the company’s possession.

• Liabilities: Loans, accounts payable, and other obligations that need to be met by the company.

• Equity: Monetary contributions made by the owner or shareholders in the business.

• Long-Term vs. Short-Term Assets and Liabilities: Those on the balance sheet that represent net economic benefits or the total assets and liabilities that a business owes to other parties in the short-term in comparison to the long-term.

Income Statement (Profit and Loss Statement)

This gives details on revenues earned, expenses incurred, and profits or loss made in particular time period.

• Revenue: Refers to sales, services, or any other form of revenue.

• Expenses: Cost of Goods Sold (COGS), Operating Expenses, and Non-Operating Expenses.

• Net Profit or Loss: Income less expenses.

• Examining Profitability Trends: Analyzing income over successive reporting time lets one assess profitability or deficit of the business.

Cash Flow Statement

Measures cash coming into or going out of the business to check on liquidity.

• Operating Activities: Cash inflows from sales and payments made for expenses incurred by the business.

• Investing Activities: Purchase or sale of company assets.

• Financing Activities: Raising capital through debt or equity, repayment of debt or equity reductions.

• Free Cash Flow: Cash able to be reinvested into the business after all Non-Operating expenses have been deducted, making it available for operational growth.

Preparing the Balance Sheet

The balance sheet aids one in gauging financial soundness and positioning.

1. List All Assets: List all assets by splitting them into current (cash, receivables, inventory) and non-current (property, equipment, and other fixed assets) categories.

2. List All Liabilities: Incorporate both current liabilities (accounts payable, credit lines) and long-term liabilities (Loans and mortgages).

3. Calculate Owner’s Equity: Equity can simply be assets total this is paid out after deducting variable total liabilities from the total.

4. Factor in Depreciation: Some assets depreciate with time and need to be fairly represented in the balance sheet.

Compiling the Income Statement

This offers a summary of income earned and other expenditures charged against that earning, depicting the value generation efficiency.

1. Figure out revenue: This incorporates all receipts from sales, services, and other operations.

2. Determine cost of goods sold: COGS = Direct cost of producing goods or services.

3. Account for rent, utilities, payroll, interest and taxes: Non-operating expenses can include these too.

4. Net Profit/Loss Computation: This is obtained after deducting total expenses from revenue.

5. Difference between Gross and Net Income: It is helps to have a better grasp on a company’s finances. There are differences when it comes to gross profit and income after expenses are made.

Creating Cash Flow Statement

The Cash Flow Statement assist businesses monitor liquidity and manage cash well.

1. Capture Sales Efforts: This should include cash payments received from sales and cash payments made for expenses.

2. Account for investing: This includes asset purchase or sale.

3. Account for capitalization: All loan proceeds, repayments, and capital contributions should be captured.

4. Cash Flow Surplus or Shortage: Check that there is enough cash to meet several obligations.

Analyzing and Reviewing Financial Statements:

Once preparations are made, it is necessary to analyze the financial statements for accuracy and insights.

• Reconcile the figures: Check these figures against the bank statement and other accounting records.

• Analyze trends: Review financial statements over a number of years to identify areas of growth and/or financial distress.

• Improvements: Identify areas where cut expenses or increased revenues.

Evaluating Seasonal Variation: Businesses that undergo seasonal shifts should prepare ahead of time.

Looking for Expert Help

Business may make use of professional help for complicated financial statements.

Engaging a Financial Accountant: Ensuring adherence to tax and accounting legislation.

Engaging a Financial Advisor: Acquiring specialized knowledge for effective financial and investment planning.

Conducting Routine Audits: Internal or external verification of information and data integrity.

Tax Advisors: Meeting tax obligations while spotting potential allowable expenses and tax credits.

The Role of Financial Statements in Business Decisions

Financial statements are basic building blocks to aid high level decisions in a business.

Increasing Activities: Analyzing financial results on the implementation of expansion plans.

Controlling Expenses: Seeking possible expenditures that do not require operational interruptions.

Obtaining Capital: Demonstrating excellent financial performance through well structured financial statements convinces investors and creditors.

Planning: Using financial statements as a base for budgets and forecasts.

Making Decisions to Invest: Deciding to reallocate money to a business, or decide to take a loss.

Finances represents a crucial aspect of every business. Therefore, generating accurate financial statements must be done with utmost seriousness. In a broader perspective, gathering financial data, comprehensively analyzing the key components of the business model, and taking decisive actions towards the vision enable businesses to achieve financial stability, and sustain positive earnings growth. With routine adjustment to financial statements and proper professional guidance – whenever necessary – financial misunderstanding, and poor performance will be eliminated, hence ensuring consistent growth of the business. Once structured properly, the financial framework will safeguard the business, especially in the volatile business environment of today’s economy. In these case, The Invoiv – a professional business management and online invoice generator tool is the your one-stop solution. Start your 14-day free trial!