At the end of the cycle, the accountant should prepare four financial statements. All of them are equally important for the successful development of small and medium-sized businesses.
Why are financial statements so important for small businesses?
In business, there are usually two statements on money management: accounting and finance. Accounting statements are created to submit to the tax services, and financial accounting helps to see the real situation with money in business and make decisions. Often, the owner makes financial statements independently or together with the financial manager.
Business is a complex system with many components. The entrepreneur manages sales, develops the product, sets up marketing, and manages employees. Parts of the system are interconnected — without marketing, there will be no sales, and without staff, there is no one to develop the product. Relationships in business can be difficult to track and evaluate. However, all of them are reflected in finances – the blood of the business that helps move it forward.
We recommend that you manage your finances consciously. So, before we talk about statements, let’s look at why they are needed:
- To avoid critical errors. Without reporting, the entrepreneurs are poorly aware of their actions — it seems that they can safely take money out of business or take the next tranche of credit. Yet, both can be disastrous and destroy the company.
- To make informed decisions. Without reporting, the entrepreneurs act blindly — they go into the unknown and rely only on their intuition. Sometimes the risk is justified, but in the long run, cold calculation and rationality win.
- To see business. For many entrepreneurs, a company is an ephemeral entity. There are employees, offices, warehouses, and goods, but all this exists in parallel dimensions. Reporting helps them reduce everything to a single denominator and see the whole business.
Making statements helps you avoid mistakes, make informed decisions, and better understand the current situation. Each of these scenarios has its own statement.
The income statement is a tabular representation of an organization’s financial results for a specific period. Along with the Balance sheet, the income statement is one of the two most important forms of accounting reporting.
Statement of retained earnings
Retained earnings statement is a financial statement that shows changes in retained earnings for the reporting period. It helps the accountant to get the resulting amount of retained earnings at the end of the period.
The balance sheet is a set of information about the value of the property and obligations of the organization, presented in tabular form. The balance sheet consists of two sections: Assets and Liabilities. The assets must always be equal to the liabilities, which is why the statement form is called the balance.
Statement of cash flows
This document is, we can say, generalizing and gives a clear idea of the company’s cash security. This is important because sometimes even if the company has a complete order with fixed assets and other funds, it may suffer from a lack of money needed, for example, to pay taxes and social contributions, pay salaries, transfer payments to suppliers, etc.
Also, the lack of a clear picture of cash is always reflected in the economic component of the organization, which is why the report is of great importance for determining future actions and prospects for finances.