Financial Statements: The core of small business decision making

Financial Statements are the heart beat of every small business; the core where money is coming in and going out. The stronger a small business owner has a grasp of their financial picture, the better to make important decisions for;

  • Budgeting
  • Continue or end business operations
  • Mergers
  • Purchases
  • Forecasting
  • Buying vs leasing (equipment, property, vehicles, etc.)

there are 4 main types of financial statements

  • Balance sheet
  • Income Statement
  • Retained earnings/deficit
  • Cash-flow

BALANCE SHEET

A balance sheet report consists of 3 basic categories;

  1. Assets
  2. Liabilities
  3. Retained Earnings

The balance sheet is the only financial statement providing a precise point of time within a calendar year. It gives the business a snapshot of their financial situation.

Note Retained Earnings for

Sole proprietor shows on a balance sheet as part of the owner’s equity (money and tangible items such as equipment) has invested into the business.

Corporations retained/deficit financial statement shows the amount of earnings available to pay dividends to shareholders and partners. 

INCOME STATEMENT

An income statement is also referred to as a profit and loss statement. This financial statement shows the businesses revenue and expenses during a specific reporting period. Here is where you find how revenues have changed into net income (profit or loss). The reason for an income statement is showing the business owner if money was made or lost during a specified reporting period.

RETAINED EARNINGS/DEFICIT

Corporation retained earnings is the accumulation of net income during a specific time period which is often the year end reporting period. At the specified end period, net income or loss is transferred from the income statement (profit and loss account) to retained earnings. If the balance shows the retained earnings as negative it is referred as accumulated losses, retained losses or other similar terminology.

Profits or credit balance can be capitalized by issuing bonus shares and distributed as dividends to shareholders. The remaining profits can be carried forward into the next fiscal reporting period. Dividends are only paid out when retained earnings has a positive balance at the specified time period such as Corporation year end.

CASH FLOW

The main purpose of a cash flow statement is the flow of cash in and out of the business. It provides a snapshot of the current operations which appear on the balance sheet. Cash flow statements are normally used for business operating, investing and financial performance. The main purpose of a cash flow statement is to help make decisions in the short term such as pay bills.

Example of cash flow statement

Operation cash flow $5,000
Investment cash flow ($1,500)
Financial cash flow ($1000)
Net Cash Flow $2,500

Are you struggling to understand any of your financial statements? Allow us to help you get a better grasp of your business financial picture. Banka & Company, CPA takes care of corporate year end Notice to Reader and Reviews. Contact us today to schedule an appointment with one of our accountants.

If you have any questions or would like to schedule a complimentary appointment, please contact us at info@bankaco.com or phone 250-763-4528.



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