Finance

The Basics of Preparing A Financial Statement

Finance plays an integral role for all kinds of businesses, whether that’s a small size firm or multi-national company. Most business owners carry out basic research about business and allied activities so that they are familiar with structure, functioning and various tasks to be shouldered by each department.

The initial months after starting your own business can be a little daunting. You are focused on implementing the plan, rather than thinking about the outcome. It’s only 3 months later or so when you carry out a financial analysis that you come face-to-face with the actual statistics.

You perhaps can skip this situation by frequently updating your financial statements and some other important financial documents. Some of them are discussed below:

Prepare an Income Statement

Income statement is also commonly referred to as ‘profit and loss statement’ or ‘P & L Statement’. As the name suggest, this statement includes precise stats of your profits and loss. This statement gives you a clear picture of your financial position in the business and you get to know overall profits and loss.

It comprises of information such as expenses and sales revenue based on your accounting journal and general ledger. That is why it is fundamental to keep your books of accounts organised.

Revenue is regarded as the fundamental income source just like sold products of the company. It also includes income generated from secondary sources. For example, if a firm has additional workspace and they rent it to a start-up. This income is supposed to be included in secondary income.

The income statement has an entry of revenue in form of assets like land, building, equipments, etc. along with interest income and gains from sale of equipments in that time frame.

The next thing that income statement depicts is the business expenses pertaining to a specific time period with both primary and secondary expenses. This gives you an overall picture if you are incurring a loss or not. If yes, then how much loss and depreciation you have to bear this year.

Do not mis-interpret depreciation calculated in income statement to be the total depreciation. Instead, total depreciation is calculated right from the date of its purchase date to its tentative useful life tenure 10 years, 20 years, etc. depending on the asset.

To sum it all, income statement provides you the net income or profit figure of your business. There are two possibilities once you get to know your net income. It either gets paid in form of dividend to the owners/investors based on company’s dividend policy or is retained by the company.

Prepare A Balance Sheet

A balance sheet is yet another financial statement that cites current financial position of the company. This is mostly the last day of the financial tenure. It is another statement that gives you a view of all your assets and liabilities. Possibly, try that your assets are equivalent to your liabilities in addition with your equity or owner’s investment.

There are chances that you may optimally use your liabilities and equity to purchase assets. In other words, balance sheet is a display of company’s financial position with respect to assets and liabilities at a particular period.

General ledger is used to make entries in a balance sheet and the format of this is according to the accounting standards. All assets, owner’s equity and liability till the last day of the accounting period are included in the statement.

There might be a difference in depreciation amount in your income statement and balance sheet. This is mainly because depreciation from the day the commodity has been purchased for the rest of its useful life. This means that it keeps on changing with each passing month.

Statement of Retained Earnings

This is an essential statement in the financial cycle. A firm needs to calculate net loss or profit this statement is prepared. This means that you can prepare this statement after preparing income statement to check your retained earnings.

This statement basically illustrates distribution of profits retained by the company. It also shows profit distributed as dividends. Retained earnings are profit retained by the firm for further growth.

Cash Flow Statement

There are times in business wherein you are making profits but have a situational cash crunch. One way out to ensure cash flow finance is to look for business loans which offer you repayment flexibility. There are some companies which do not charge any hidden fees and reject your loan on baseless grounds.

There are some trust-worthy firms who offer unsecured business loans to all kinds of business you can get in touch with them for better funding options.

Yet another way to ease your business cash flow is to prepare a statement like you prepare balance sheet or income statement. This statement helps you to compare two periods based on the financial data and analyse the change in expense, asset, revenue, liability and equity.

However, you must be aware about the fact that you need balance sheet, income statement and statement of retained earnings to prepare cash flow statement. So, this statement has to be prepared in the last as it gives a comprehensive picture of the financial moves in the organisation.

The cash flow statement depicts position of business on cash basis and not on accrual basis. The cash basis includes revenue received (from customers mostly).

It is believed that financial statements can be prepared only annually when the year ends. But, it depends on the company as they can be made for any length of time and at any given point. Some companies have a stringent control on finances and prepare statements on monthly basis.

If not on a monthly basis, at least once a year may be towards the end of the financial year.

All of these four statements are crucial as they give you valuable insight into your previous financial year. You can use this insight to plan the next financial year in a way that you earn better profits. It also highlights mistakes of the past so that you do not repeat them in the next accounting year.