Financial statements are the success factor

Ask entrepreneurs what ingredients form the lifeblood of their businesses and most will say enthusiasm, commitment and dedicated service. While all of these are very important, entrepreneurs who know where their businesses stands financially are the most successful. They also know that financial statements are the glue that holds any business together.

Financial statements enable business owners and other professionals such as accountants, bankers, and potential investors in a business, to see how a business is performing. The main elements of a financial statement are:

Financial Statement (Photo credit: LendingMemo)

Balance sheet

A balance sheet, which gives a full picture of a business, provides detailed information about a company’s assets, what it owes (its liabilities), the number of shareholders in the business and the percentages they own (shareholders’ equity).

Income statement

An income statement shows the revenue earned during a defined period and the costs and expenses involved with earning the revenue. It shows whether the company was profitable or not.  An income statement tells the owner what the gross profit of the company is. This is derived by taking total sales (total monthly turnover) and deducting the cost of sales (any costs undertaken in providing a service or making a product).

Cash flow statement

A cash flow statement reports on cash inflows and shows what has been paid by customers. It also shows cash outflows such as money paid to suppliers and stock purchased. It also adjusts for provisions like depreciation where no actual cash has changed hands. A cash flow statement also helps the owner focus on reducing debtors, controlling stock and other aspects of the business.

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