How well does your company control its financials?
When looking for funding, whether through investments or loans, the institutions that you interact with
will likely ask about your financials and they will most likely seek are the following reports: income
statement, balance sheet, and statement of cash flows. This article dives into the basics of each.
Together, they reveal a significant information about your company’s financial health, both present and
future.
Income Statement
Also known as the statement of profit and loss, or simply P&L statement, this is the most commonly
sought of the three. It gives a picture of how much revenue you generated, how much you incurred in
terms of expenses, and how much you were able to retain as your final – or net – profit. The statement
covers a period of activity ending at a particular time, for example “Year ending in December 31” or
“Quarter ending in March 26.”
Balance Sheet
This document, also known as statement of financial position, gives a description of what your company
owns and owes. For more understanding, it is worth highlighting the accounting equation, where Assets
= Liabilities + Owners Equity. The equation states that by definition, changes in your Assets translate
into changes in Liabilities (what your company owes, such as accounts payable, loans, etc.) and/or your
Owner’s Equity, which is the portion of your assets that belongs to its owners or shareholders.
The income statement tracks activity throughout a period of time, but the balance sheet reports the
financial position of your company at a particular point in time such as “as of March 31.”
Statement of Cash Flows
Also known as the cash flow statement, this document is crucial in summarizing your company’s
movement of cash. You may know how much revenue and expenses you encountered by looking at your
P&L statement, but it is also important to understand how much of that movement turned into actual
cash for your company during the period in question.
You may also know how much change you had in cash between two periods by looking at your balance
sheet, but it is also crucial to know how that cash has moved. This is one of the things that the
statement of cash flows can answer. Generally speaking, the statement tracks changes in cash from
Operating activities, Investment activities, and Financing activities.
Similar to the income statement, the statement of cash flows tracks your activities throughout a period
of time.
In Conclusion
To determine the financial health of your company, the income statement, the balance sheet, and
statement of cash flows can be extremely useful. The way that financial statements look vary with the
size, capacity, and requirements of the organization. Additionally, different industries will have different
items, and the complexity or amount of detail that goes into each statement also varies.
Regardless of your company size, it is good practice to start compiling your statements as early as you
can, as this can provide significant history for both internal and external stakeholders that apply to you.
Need help in compiling, interpreting, or even understanding what to do with your financial statements?
Our professionals at Ubuntu Business Solutions are more than capable of assisting you and helping take
your company to the next level. Feel free to reach out to us and we look forward to interacting with you!
