If you are a lover of numbers, then these are your dream play place. However, if numbers, calculations, and super lengthy spreadsheets are synonyms for headache for you, then you should steer clear of this inevitable segment of business and let someone from former category take care of these.
Financial statements can be simply defined as the written records that communicate the financial strength and performance of a business. They contain, if prepared properly, record and details of every single transaction of a company, with amounts, values, dates, and perhaps even time. All business decisions from scaling up or down, to investing or divesting are dependent on these very statements.
Financial statements can be prepared for any period of time by a business, but as per legal requirements companies are necessitated to prepare at least annual statements, but in some cases semi-annual or quarterly financial statements may also be required. Publicly listed companies have stronger requirements from regulatory authorities as compared to private limited or partnerships when it comes to financial statements.
Types of Financial Statements
Each business has distinct needs and may choose to keep a variety of financial statements as per their requirements, but legally and universally there are three main types of such statements:
Why financial statements are important?
Without having a clear and numerical idea of the financial position of a business, no significant decisions can be made towards profitability and growth. Even for the day to day decisions, such as credit period to be allowed to customers, the business needs to know its liquidity position. For bigger decisions, like investments or expansion, the record of assets, sales, recovery of cash, as well as total profits are required. For external parties, such as tax authorities, total expenses and revenues of a business need to be accounted for. And likewise the ability to pay suppliers on time, production duration, sales cycle, cash flow position, and expenses in relation to revenues are all significant. In short, it is impossible to carry a business without proper and complete records of all its financial dealings.
Financial Statements Outsourcing
As explained in the beginning of the article, preparing financial statements is a tedious, meticulous and sensitive task. Left to those who get confused by numbers, are inept in the legal requirements of financial statements, or are reckless with calculations can lead to monumental disasters for a business. At the same time finding qualified people for the job can be difficult and expensive. Outsourcing companies exist and are flourishing for a reason. They reduce your work load and costs at the same time. At Intersoft qualified financial analysts are responsible for preparing, maintaining and updating your financial statements that keeps you informed of your financial position, helps you avoid legal fines and penalties, and gain efficiency, all the while keeping a lid on your costs.
Income Statement or Profit & Loss account: As the name implies this is the record of day to day business activities. Sales, cost of sales, revenues and expenses from other sources than primary business activities, rental charges, and even intangible expenses like depreciation and amortization are all part of this statement. Net profit or losses are calculated from this statement by subtracting all expenses from total revenues – hence the other name ‘Profit & Loss account’.
Balance Sheet: Also known as the statement of financial position, a balance sheet shows the position of assets owned by and liabilities owed by a business at any point in time. There is a third section in Balance sheet of ‘equity’. This is slightly more complicated to understand but in layman’s terms this is the stake that owners have in a particular business or what a company owes to its owners. In numerical terms this is equal to the difference between assets and liabilities.
Cash Flow Statement: This is the statement that shows the liquidity position of a business, and keeps track of how much cash, cash equivalent, and easily sellable assets a company owns. This is further divided into three main categories to keep track of where the cash is coming from or going to. These are operating activities – primary business processes, investing activities – the sale and purchase of assets, and financing activities – the loans borrowed or paid back, share capital issued, interests, dividends and so on.
A fourth form of financial statement, called ‘Statement of Changes in Equity’ is also sometimes kept to keep track of the equity (the header from balance sheet) details. In addition to share capital changes and dividend payments, this statement also accounts for the profits retained, any revaluations in total equity, and any corresponding changes in accounting policy.
Audited Financial Statements
Companies are legally required to get their financial statements audited at least once a year to ensure that correct financial reporting is done, tax payments are being made, and other compliance requirements are being met. These are done by independent auditors – called external audits, but sometimes businesses like to get their statements audited regularly to avoid any confusions and penalties later for which they keep in-house auditors – called internal audits. Audited statements are more credible than unaudited statements and are useful in risk assessment of the business as well as in identification of any wrongdoing, mistakes, or frauds in the finances.
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