If you are a new small business owner or a small business owner looking to expand your business, you’ll need financing. Whether you choose to go with investors or seek loans from a financial institution is important that you have all the documents needed to increase your chances for financing. Besides a business plan, the most important documents you will need to help you get investors, keep investors, or obtain loans are financial statements.
There are four main statements that you will need. These four statements are the income statement, the balance sheet, the owner’s equity statement, and the cash flow statement. Every business owner must understand all four of these statements and the information they provide.
The Income Statement
The income statement helps investors and lenders the idea of your business’s performance over a specific timeframe. The income statement is also known as a profit and loss statement (P & L) or revenue and expense statement. It shows investors and lenders your business’s nonoperating and operating expenses and revenue, no matter what it is called.
A person will share the business’s income statement to help potential investors and lenders understand how your business performs and whether the investment would be a good one.
The Balance Sheet
The balance sheet is also known as a statement of net worth or a statement of financial position. The balance sheet is based upon the equation assets = equity + liability. This statement will show investors and lenders your business assets, liabilities, and equity. It also provides them with the overall position of your business over a specific timeframe. Generally, the balance sheet is used to help your accountant calculate financial ratios.
The balance sheet is perhaps the most commonly shared financial statement because it gives a great overview of its financial position. It also quickly gives investors and lenders an idea of whether financing your business is a safe and minimal risk.
The Cash Flow Statement
The cash flow statement is also known as a statement of cash flow or a statement of financial position changes. The cash flow statement is used by investors or lenders, and the business owner and accountants to see whether the business generates enough cash to meet obligations and operating expenses. In other words, it gives everyone an understanding as to how the business is managing its cash flow.
The cash flow statement is crucial for understanding the business’s ability to pay bills, accounts payable, and meet payroll and inventory demands. This statement should not be confused with the owner’s equity statement. This is the money used from profits to finance the business’s daily operations and is not an investment.
The Statement of Owner’s Equity
The statement of owner’s equity is also known as the statement of changes in equity or a statement of shareholder’s equity. This statement specifically shows profits and earnings that are being retained by the business and not distributed to shareholders. These earnings are generally used to reinvest in the company, pay off debts, or finance business growth.
This statement is generally used to give an idea of the financial stability and health of a business. It shows if a business can meet financial and operating needs. All done without requiring new contributions of capital from the owners or shareholders.
Conclusion
These very important financial statements will be used in multiple ways. They will be used when seeking investors or trying to obtain business loans. They are also used after a business is established to give shareholders, possible investors, and lenders an assessment of the business’s financial aspects. It is essential that these four financial statements be accurate and up kept. These four financial statements can be the difference between your company receiving funds and financing and going out of business.
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