The Importance Of Financial Reports For Entrepreneurs
Why check and balance is essensial in running a business
Many entrepreneurs get too overwhelmed with financial reports that they try to avoid it. When we are starting up, we tend to focus on everything– products, marketing, sales leads– except financial reports.
However, no matter how you want to avoid it, as an entrepreneur, it is your business to know where your money is coming from, how much money you have, and where your money needs to go. Well-prepared financial reports will help your business to the next level.
Our business is knowing how we run a business, and financial reports delineate where our financial position is.
While you may already know that financial reports are important mainly because it is required by the law, you should also know that it gives power and potential to your business. Generally, financial reports will serve as your tools for evaluating the financing activities, investing activities, and operating activities of your business. In a technical view, financial reports summarize the financial position of your business in a given period.
Think of your financial reports as like a financial dashboard of your business. When your business is self-sustaining, it is imperative to get these financial reports set up. If you plan on getting a loan or financing options, your reports will be your profile for the banks or any financial institution for granting you a loan. Rather than underestimating their assertion, you can do your independent analysis and foster counter-offers as you negotiate.
No matter what size or industry your business is in, there are three financial reports that all entrepreneurs must know on the back of their hands: (1) Income Statement, (2) Balance Sheet, and (3) Statement of Cash Flows.
An Income Statement also called Profit and loss is one of the major and compulsory financial reports. It gives data that measures the profitability of your business from gross, operating, pretax to after tax.
This is the basic formula of an income statement. The end goal here is to get the Net Profit of your business for an accounting period– can be monthly, quarterly, or annually. It is the net profit that will tell you if your business is profitable or not.
Your business’ income statement will show the real strength and acquiring influence of your business throughout a time length. It gives a reasonable image of whether your business activities are bringing out a profit or a loss in the wake of considering every one of the connected consumptions. Thus, your organization can make restorative moves if there is a need to do as such.
While the income statement answers your question on how profitable your business is, the balance sheet will answer these main questions: 1.) What revenue is the certain business generating? 2.) What are the costs incurred in generating the revenue? and 3.) How much investment do you have for the future growth of your business?
A balance sheet is a financial statement that reports your business assets, liabilities, and shareholders’ equity at a specific period in time. Because it summarizes your business’s finances, the balance sheet is also sometimes called the statement of financial position. It reveals your business’s overall financial health. At a glance, you’ll know exactly how much money you’ve put in, or how much debt you’ve accumulated. Or you might compare current assets to current liabilities to make sure you’re able to meet upcoming payments.
All balance sheets are organized into three categories: assets, liabilities, and owner’s equity.
- Asset: pertains to anything the company owns that is of value; this description also extends to cash.
- Liabilities: anything a company owes, either to people or other businesses
- Owner’s Equity: represents funds that would be available to the collective owners if the company were to sell off all its assets and pay all of its liabilities.
Statement of Cash Flow
This statement indicates incoming and outgoing cash flows that affect the condition of your funds. Statement of cash flow is an analytical presentation of the data presented in your balance sheet, concerning the change in funds that have been made in the reporting period.
This statement answers the question of whether your business is liquid enough to cover short-term payments rather than relying on credits. The statement enables users of the financial report to determine how well your business’ income generates cash and to predict the potential of your business to generate cash in the future.
Cash flows should be indicated separately for particular areas of activity: operating, investing, and financing. Operating activities detail cash flow that’s generated once the company delivers its regular goods or services, and include both revenue and expenses. Investing activities include cash flow from purchasing or selling assets, physical property such as real estate or vehicles, and non-physical property, like patents—using free cash, not debt. Lastly, financing activities detail cash flow from both debt and equity financing.
Why are financial reports vital when running a business?
Every entrepreneur needs to know these reports since it gives you data that helps you in making business decisions and it also gives you data about the financial circumstance, financial execution, and changes in an element’s financial position that are usable by a wide scope of clients in settling on their financial choices.
When your business has to make a decision, financial reports must be examined. Managers can assess the worth of your business’s present assets to determine if it can afford to buy more. Managers can determine if assets need to be sold off when their value has declined significantly.
From the financial reports, you can determine your business financial condition and how it has worked during the periods for which the investigation is led, and what are future patterns around there.
The pitch of a cutting-edge business climate is described by the amazing dispatch of boundaries that leave an imprint on the organization that works in it. Hamilton, executive, and originator of Sageworks, a financial data organization says. “You don’t want to be worrying about paying the next bill. You want to be focused on growing the business.”
Tragically, regardless of how skilled and submitted you are to your products or services, if you don’t take care of the financial side of your business, it’s probably going to fizzle.
The importance of financial reports doesn’t stop on the internal management, it also applies to external stakeholders who should be aware of the relevance of your business’s financial reports. If someone owns stock or is an active investor with a large stake in your business, having complete disclosure of all assets, liabilities, cash flow, revenues, and corresponding business costs is critical. Stakeholders can tell if your business has adequate cash to cover expenditure and acquisitions by looking at your financial reports. It will also tell them whether your business is doing something it shouldn’t be doing (like in the case of Enron).
Financial reports, we may say, provide useful information that assists your business in several ways. Strong and reliable financial reports across sectors encourage healthy competition and allow capital inflows. It improves generally in communicating the business’ previous accomplishments and future goals.
It may be too intimidating to emerge yourself in the accounting side of your business but knowing and understanding these reports will help you, your management, and your stakeholders.
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2008). Managerial accounting. Boston: McGraw-Hill/IrwinBondarenko, P. (2019, October 7). Enron scandal. Encyclopedia Britannica. https://www.britannica.com/event/Enron-scandal
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