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While it is important for all organisations to maintain financial records to track their business, some companies have additional reporting requirements. Basically, financial reports have a statement to know the financial position of the company, a statement of income, a statement of equity changes, a statement of cash flows, an auditor’s report, and a directors’ report. In today’s blog, we’ll discuss a few things to understand financial reports.

Understanding Financial Reports

The financial report, including the audit report, helps provide important information about an entity. Various people use financial reports to assess the financial position and performance of an entity along with changes during the financial year. Generally, financial reports can help readers make better decisions when they deal with an entity.

You need to consider looking at your company’s financial statements. Start with some simple questions:

Question 1: Is the company making a profit consistently or does it fluctuate between profits and losses every few years?

Consider looking at the income statements.

Question 2: Do the day-to-day operations of the company generate excess cash each year? To what degree does this cash flow cover the expenses related to equipment renewal and new investments?

Check out the cash flow statements.

Question 3: How much does the company borrow to support its operations? And, what proportion of the company’s total assets is made up of borrowed funds?

Check the balance sheet.

3 Major Financial Statements to Understand

The following are three main types of financial statements that every business owner must know about:

  • Profit and loss statement

A business owner can come to know about the profitability of the company for a specific time period through a profit and loss statement. It can help you know where your business is performing well and where it may be facing problems. For investors, an income statement represents the financial health of the company before they decide to invest.

  • Cash flow statement

As the name implies, the cash flow statement shows how much cash is flowing in and out of the company over a specific period of time. Having enough cash to pay your loans and buy assets and materials is an important part of your business planning.

  • Balance sheet

Basically, a balance sheet is a summary of all assets of your business (what it owns) and liabilities (what it owes). It will show you how much money your business would have left if you sold all your assets and paid off all your loans. It is also called ‘owner’s equity’.

Why should you prepare financial statements?

Each financial report has a different purpose, such as:

  • Determine the profitability of the business

By using the profit and loss report, you can come to know about the actual profitability of your business instead of making a blind estimate based on your bank balance. Typically, income statements comprise your total revenue subtracted by your overall expenses (or direct costs) to calculate the net income (or loss) of your business.

  • Assess tax liability

As your business grows and revenue increases, taxes also increase. Many business owners are surprised by the amount of tax they have to pay and the small amount left afterwards. To reduce your tax burden, it’s crucial to know your financial numbers accurately, and here professional accountants in Melbourne can help you. Once they determine your tax liability, they can explore ways to decrease the amount of tax paid on your business activity statements.

  • Identify and remove errors

Accurate financial statements are essential to identifying costly errors, irregularities in business procedures, or even unlawful activities. The reconciliation of financial data can help uncover any discrepancies and rectify them.

  • Improve decision making

Financial statements, such as the balance sheet (also known as the statement of financial position), can offer a clear visual representation of where investment opportunities may lie if you’re seeking growth and want to reinvest in your business. By examining the assets the business currently possesses and determining whether it can afford to acquire more, financial statements provide essential information that cannot be obtained elsewhere.

Conclusion

Every business owner must know about financial reporting to run a business effectively. Moreover, you can get in touch with Reliable Melbourne Accountants for more information on financial statements.

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