Every business utilizes financial statements to get a snapshot of the financial health of their company. Without financial statements, you wouldn’t be able to monitor revenue, project future finances, or keep your business on track for strong earnings. These financial statements must be processed in a specific order. However, before we discuss the importance of that order, it is essential to understand the function of each of the four primary financial statements.
Cash Flow Statement
The cash flow statement is all of your business’s incoming and outgoing cash. This statement only records the actual cash that your company has on hand. The three components of a cash flow statement are operations, investments, and finances. If your cash flow is positive, your business has more money coming in than going out. If you have negative cash flow, you are spending more than you are making.
The cash flow statement can be used by investors, lenders, and vendors to determine whether your company is a good investment. You can also use your statement to create a cash flow forecast.
The Balance Sheet
The balance sheet tracks your financial progress over time and consists of assets, liabilities, and equity. Your total assets should equal your total liabilities and equity. If they do not, your balance sheet is unbalanced, and you must find the source of this discrepancy. The balance sheet is a significant indicator of your company’s current financial health, as well as how it may do in the future. Like most financial statements, your balance sheet is critical for helping you make guided financial decisions.
Also called a profit and loss statement, your income statement reports the profits and losses of your business over a specified period. You can use an income statement to summarize business operations for that time frame, which may be monthly, quarterly, and so on.
You may use your income statement to determine how profitable your business is. The last line of your statement, the bottom line, shows you your net income or loss. The income statement is one of the four financial statements which can help you assess profitability over a specific time.
Statement of Retained Earnings
The statement of retained earnings is also known as the statement of owner’s equity. This financial statement lists what your business’s retained earnings are at the end of a period of accounting. Retained earnings are profits which you can use to pay off liabilities, or to make investments. You can use this statement of retained earnings independently or as part of your balance sheet. If your statement is positive, this means you have extra money to pay off debts or purchase more assets.
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