Whether you run a nonprofit organization or are in charge of running a small business, effective financial reporting is crucial to the success of your business or organization. While there are many components necessary to creating effective financial reports, the financial statement plays an important role. Financial statements are used to show the true status of your company or organization’s financial standing and are usually run on a monthly basis. Monitoring the financial health of your company periodically can mark the difference between your company’s success and failure. We recommend reviewing your financial statements once a month in order to gain a good picture of your true financial standing and to adjust your financial planning for the remainder of the year.
What is a Financial Statement?
A company’s financial statement, in simple terms, is composed of three primary financial statements: the balance sheet, the income statement, and the cash flow statement. Each statement provides valuable insight into your company’s financial health. The balance sheet, for instance, is a summary of all your financial balances as a company or organization. It is often described as the “snapshot” of your company at a particular point in time. The balance sheet includes a summary of three parts: the company’s assets, liabilities, and the owner’s equity. The assets include everything pertaining to the business’ value (everything that is owned or owed), liabilities include everything that the business itself owes, and the owner’s equity is the owner’s share of the business (calculated by subtracting the company’s liabilities from its assets).
The income statement, more commonly known in the business world as the Profit and Loss statement, summarizes the profitability of a business (or lack thereof) at a single point in time. Companies can measure the profitability from any given time, such as from Quarter 1 to Quarter 2 or from August 1st to February 1st. The cash flow statement simply converts the company’s finances from an accrual basis to a cash basis and measures the flow of cash that has gone – and is going – out of the business.
How Can the Financial Statement Lead to Effective Financial Reporting?
Seeing the true financial status of your company can help improve your decision-making skills and clarify any questions you may have. Financial statements summarize business trends, measure the rates at which you are collecting receivables and paying creditors, summarize cash flow problems, help you determine which customers are in good standing, and highlight customers who are in need of collection efforts (or who have uncollectible open invoices). They also help you create more effective financial reports which – in turn – help guide your business to success.
Financial statements generally include a summary of your company’s accounts payables report, letting you know much you owe to other companies and when it is due. You can also run financial reports showing your current inventory levels and the value of that inventory. The purpose of the financial statement is to answer any questions you have regarding what you owe, what you own, and how much your company is making. These questions need to be answered in order to make strategic decisions on how to run your company more effectively in the future.
All statements and reports included in the financial statement are valuable to the financial process and should be treated as such. Reviewing these statements on a regular basis can increase your chances for success and provide you with an accurate view of your company’s financial standing at any given point in time.
If you need help making strategic financial decisions for your company (or would like us to walk you through the value of a balance sheet), contact us today. If you run a nonprofit organization and would like to learn more about effective financial reporting, stay tuned to our blog.