Managing your business finances effectively is crucial for understanding your business stability and ensuring long-term success. This is why businesses track financial statements, particularly the balance sheet, profit and loss statement, and trial balance.
Financial statements provide a detailed overview of your business’s financial health and performance. The information found on an organization’s financial statements is the foundation of corporate accounting. This data is reviewed by management, investors, and lenders to assess the company’s financial health and position.
So, financial statements are not just for accountants; they are for anyone looking to understand and grow their business.
In this guide, we’ll explain three key financial statements available on BizKit and what they tell about your business.
What are Financial Statements?
Financial statements – or Financial reports – are formal records that outline a business’s financial activities and conditions.
As business records, financial statements provide a clear, organized, structured and easily understood overview of your business’s financial performance. Why?
They’re crucial for different stakeholders and are often audited by management accountants, tax firms, lenders/creditors, government agencies or potential investors to make informed decisions.
In retail, where sales, inventory, and expenses fluctuate regularly, keeping a close eye on these statements helps you stay on top of your business’s financial situation and decisions.
The 3 Key Financial Statements Your Business Should Keep
The three basic Financial Statements that every business should keep are;
- A Balance Sheet
- An Income Statement (profit and loss statement)
- A Trial Balance
Exciting News… You can now access these three business financial statements on BizKit, your comprehensive business solution built for growth.
Let’s discuss them below and find out what each means for your business.
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1. The Balance Sheet
The balance sheet – often referred to as the statement of financial position – is a snapshot of your business’s financial status at a specific point in time.
It reflects your businesses’ liabilities, assets and equity at a single point in time.
- Assets (what your business owns)
- Liabilities (what your business owes (others)
- Equity (the owner’s residual interest in the business)
The balance sheet statement is a snapshot of your business’s Net Worth and is crucial for evaluating its ability to meet its financial obligations.
A balance sheet is calculated as:
Assets – Liabilities
Assets = (Liabilities + Owners Equity)
Key features of a balance sheet:
- Shows the financial position of a business
- Expressed as a “snapshot” or financial picture of the company at a specified point in time (i.e., as of August 31, 2024)
- Has three sections: assets, liabilities, and shareholders’ equity
- Assets = Liabilities + Shareholders Equity
In the most simplistic form, a balance sheet shows Assets on the left column and Liabilities and owners’ equity on the right column. The best practice (standard accounting) is to list the Assets in order of liquidity, and the two columns need to ‘balance.’
- Assets: These include current assets such as cash, inventory, and accounts receivable, accrued revenue, as well as long-term assets like property, equipment, and investments.
- Liabilities: This section covers what your business owes, including short-term liabilities like accounts payable and long-term debts such as loans.
- Equity: This is the value that would be returned to shareholders if all assets were liquidated and all debts paid. It’s essentially the owner’s claim on the business.
What Does the Balance Sheet Tell About Your Business?
The balance sheet allows you to assess your business’s liquidity, financial flexibility, and capital structure. It provides insight into how well-positioned your business is to handle financial challenges.
For instance, the balance sheet can indicate whether your business has enough assets to cover its liabilities, offering a measure of liquidity.
It also shows the proportion of debt versus equity financing, highlighting how much leverage your business is using.
A strong balance sheet with more assets than liabilities indicates a financially healthy business, while a balance sheet heavily tilted towards liabilities may suggest potential solvency issues.
2. The Profit & Loss Statement (Income Statement)
The profit and loss statement has multiple other names, such as income statement, Statement of Earnings, Operating Statement and Revenue Statement.
Regardless of the name used, the income statement’s core function is to provide an overview of your business’s expenses, revenues, costs, earnings per share and net income over a specific time.
The time can be a month, quarter, or year.
The income statement is fundamental in assessing the business’s performance and profitability within the period. It displays sales revenue at the very top and then deducts the cost of goods sold (COGS) to find gross profit.
The gross profit is then impacted by other operating expenses and income to reach a net income at the bottom — “the bottom line” for the business.
This statement is fundamental in assessing your business’s profitability. It provides a detailed look at your operating performance, showing whether your business is generating a profit or incurring a loss.
Key features of the income statement are:
- Shows the revenues and expenses of a business
- Expressed over a period of time (i.e., 1 year, 1 quarter, year-to-date, etc.)
- Used to assess business profitability
- Revenues: This includes all the income generated from sales of goods or services.
- Expenses: These are the costs incurred in the process of earning revenues, including cost of goods sold (COGS), operating expenses, interest, and taxes.
- Net Profit: This is what remains after all expenses are deducted from revenues. A positive net profit indicates your business is making money, while a negative figure suggests losses.
What Does the Income Statement Tell About Your Business?
The Profit and Loss Statement Insights has some great insights for your business. First, it helps you identify the business’ profitability and trends in revenue and expenses. This statement directly shows whether your business is making or losing money and why.
It also assesses cost management effectiveness and helps you make informed decisions about pricing, budgeting, and expense control.
Analyzing the profit and loss statement helps you understand revenue streams, cost structures, and profitability drivers. By identifying high expenses or declining revenues, you can make targeted adjustments to improve your business’s financial performance.
3. The Trial Balance
The trial balance is a comprehensive accounting report that lists all the balances from your business’s general ledger accounts at a specific time. It shows the accounts that have debits or credits during an accounting period.
The trial balance’s purpose is to ensure that the general accounting ledger is correct and that the total debits match the total credits. This is essential for accurate financial reporting.
While the trial balance itself doesn’t offer the insights found in the balance sheet or profit and loss statement, it plays a critical role in maintaining accurate financial records.
- Ensuring accuracy: The trial balance is used to detect any discrepancies in the bookkeeping process, ensuring that all transactions are correctly recorded.
- Foundation for Financial Statements: It provides the foundation for preparing the balance sheet and profit and loss statement, ensuring they are reliable and accurate.
Accurate financial records, validated by the trial balance, help prevent costly errors and misstatements that could mislead stakeholders and result in poor decision-making.
What Does the Trial Balance Tell About Your Business?
The trial balance, while not typically used for financial analysis, is a vital tool for ensuring that your accounting is accurate and your other financial statements are reliable. It serves as the first line of defense in identifying accounting errors that could distort your financial analysis and decision-making.
How Can You Interpret and Use Financial Statements to Your Advantage?
1. Identify Financial Health
Regularly reviewing your financial statements allows you to monitor the financial health of your business. For example, a strong balance sheet with a healthy ratio of assets to liabilities suggests good financial health, while consistent losses in the profit and loss statement indicate a need for strategic changes.
2. Understand your Profitability
Use your financial statements to understand whether you’re making profits or losses and where you have the highest expenses. The profit and loss account will tell you how your performance is rated and whether you should continue the business based on your profitability.
3. Make Informed Decisions
Financial statements provide the data for informed investment decisions, cost management, and pricing strategies. For instance, if your profit and loss statement shows high operating expenses, you might consider cost-saving measures or efficiency improvements.
4. Plan for the Future
Analyzing trends in your financial statements can help you forecast future performance and set realistic goals. Whether it’s planning for expansion, reducing debt, or increasing profitability, financial statements offer the insights needed to align your strategies with your financial goals.
Access Financial Statements with BizKit
All three accounting statements are important for understanding and analyzing a company’s performance from multiple angles. The income statement provides deep insight into the core operating activities that generate earnings for the firm. The balance sheet and trial balance, however, focus more on the firm’s capital management in terms of assets and structure and credit and debit.
You can access your business’s three key financial statements on BizKit: balance sheet, profit and loss, and trial balance. These statements can help you effortlessly track your business’s performance.
BizKit’s user-friendly platform makes viewing, analyzing, and interpreting your financial data easy. It empowers you to make data-driven decisions that drive growth and improve financial stability.