To understand how well your company runs, you must know two records: income statement and balance sheet.
The income statement shows you how profitable your business is over a given period (through revenues and expenses), while the balance sheet gives you a snapshot of your assets and liabilities. Together, they’re a financial force to be reckoned with.
In the following guide, we’ll explore the role of these financial statements to show just how useful they can be to your business.
How Financial Statements Benefit Businesses
Understanding and utilizing these financial statements offer practical advantages. They enable informed decision-making by revealing strengths and weaknesses in revenue, expenses, gains, and losses. Additionally, they assess financial health, instilling confidence for investors and creditors. Moreover, these statements are crucial for future planning, guiding financial goals and growth strategies. In essence, they empower businesses to navigate finance, make informed decisions, and ensure a prosperous future.
Income statements - show you what you’re working with
An income statement, often called a profit and loss statement (P&L), is a critical financial document that provides a snapshot of a company's financial health over a specific period.
Purpose:
Revenue Analysis: It details the sources of revenue, highlighting profitable areas.
Expense Tracking: All expenses are accounted for, aiding cost management.
Gains and Losses: It factors in gains (non-operating income) and losses.
Net Income: The bottom line, net income, reflects overall profitability.
Earnings Per Share (EPS): For publicly traded companies, it calculates EPS, vital for investors.
Income statements offer time period flexibility, allowing businesses to track performance over different intervals. These statements are crucial for informed decisions about revenue growth, expense management, and overall financial health. Essentially, income statements reveal revenue generation, expense management, and financial well-being, serving as a guide for data-driven decisions leading to financial success.
Balance sheets - show you the big picture
By knowing what a company owns (assets), what it owes (liabilities) and what is leftover for the company owners after paying off any financial obligations (owner’s equity), it is possible to understand what the company is worth at a particular moment in time.
The basic calculation used by a balance sheet is:
Assets = Liabilities + Shareholder/Owner Equity.
The balance sheet is precisely the financial statement that helps to communicate all information about a business to those who might be interested in knowing, such as creditors, investors, and owners.
Read More: Balance Sheet vs Profit & Loss Account
Read More: 6 Important Steps in the Accounting Cycle
Conclusion
In conclusion, the income statement and balance sheet are indispensable tools for achieving business success. They provide crucial insights into financial performance, guiding informed decisions and strategic planning. By understanding and utilizing these financial statements, businesses pave the way for prosperity, whether through profit maximization, investment attraction, or future growth. For every business builder, mastering these tools is essential for navigating the dynamic world of business and securing a prosperous future.
If you need advice or services on any aspect of bookkeeping, accounting and tax, our specialists are ready to help. Get in touch with us for free quote.
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