Who Uses Financial Statements? and why…

/, Government Procurement/Who Uses Financial Statements? and why…

Who Uses Financial Statements? and why…

Who Uses Financial Statements? and why…

The idea having financial statements for a business may be a new concept for some. I’ve have plenty of clients who’ve started their businesses without them. They simply draw down funds from the accounts and start their business. If they can do it, why not everyone? It then becomes the question: who uses financials statements? Before I answer that question, let’s start off by talking about what exactly is a financial statement.

Cash Flow ExampleBreaking down the Financial Statement

Balance Sheet – In a nutshell, the balance sheet gives a snapshot of a business’s assets, liabilities, and equity. In an earlier post, I talked about the balance sheet in more detail. I encourage you to check it out, as it includes a template you’re free to use.

Income Statement – I always think the name income sheet is misleading, because it makes it sound like it’s all about revenue. In actuality, an income sheet relates to profits and losses. That is, it tracks the income, EXPENSES, AND PROFITS of a business over a period of time.

Equity Statement – This section refers to the company’s equity or retained earnings. Like the income statement, it covers a specified period of time. Whereas you’d find a summary of the retained earnings on a balance sheet. In the equity statement, you’d find the retained earnings laid out by line items.

Cash Flow Statement – Cash flow statements are one of my favorite parts of financial statements. In this section, you’ll be able to see how a company’s financials ebb and flow based upon its operating, investing, and financing activities.

Financial Analysis Simplified

Analyzing Financial DataSo, what does all this tell you about the state of a company’s financial health? Typically, if your balance sheet looks good, you’re company is doing well overall. The Income statement also shows the health of a company. However, it only shows the health of the given period of time identified on the income statement. If we flip things and talk about unprofitable balance sheets and income statements it’d be more on the lines of: If you have an unprofitable income statement 12 months, you’ve just had a bad year. On the other hand, if you have an unprofitable balance sheet, you have an unprofitable business over all.

I find retained earnings rather interesting, as the negative or positive balance rolls over from one year to the next. For instance, if your retained earnings are $50,000 in one year and the next year your net earnings is $30,000, your new retained earnings would be $80,000. If the next year, you have a net loss of $20,000, you’re new retained earnings would be $60,000. What makes retained earnings so important is it refers to how much capital a business has to invest in other areas, such as research and development, equipment, training, or other aspects that might enhance the profitability of an organization.

So! Now that we understand what exactly is a financial statement, let’s talk about who cares about them.

Investors/Bankers – The piggy banks

Investments and ProfitFirst of all, investors (and I’m including bankers in that category) care about your financial statements, because they want to know your company is in good health before they give money to you. Investors don’t give you money out of the goodness of their hearts. They give you money because they plan to make a return on their investment ROI. If your company isn’t in good shape, the chances of them getting an ROI is risky. Smart investors and Bankers understand every venture has a risk. However, they keep their risks in acceptable levels — calculate their risks.

Government Contracting – Sucking up to Uncle Sam

I mentioned minority owned businesses in another post being able to qualify for economically disadvantaged designations. Your financial statements will come into play in this situation. If you’re looking for more details in government contracting and disadvantaged businesses, I encourage you to check out that post.

Business Owners – It’s all about you

FreshBooksLast, but not least, YOU need to understand the financial health of your business. I often create financial projections for business owners. However, I often have misgivings about doing so. Why? because business owners miss out on the opportunity to gain understanding through development of their financial statements, and it’s important for business owners to understand how their business is doing so they can make adjustments as needed. Staying up to date on your financials can save you a significant amount of money, as you’ll be aware of adverse conditions earlier than later and can act accordingly.

How much involvement do you have in creating your financial statements?


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By | 2016-12-09T14:10:40+00:00 January 22nd, 2016|Business Financials, Government Procurement|6 Comments

About the Author:

Renee Townsend is a Certified Professional Coach and Business Consultant, who helps women start, grow, and run successful companies. She has a special knack for finding money for startup businesses and helping entrepreneurs get funded.

6 Comments

  1. Peter January 24, 2016 at 8:20 am - Reply

    Hi Renee,
    Having been a small business owner most of my life, I certainly realise the importance of financial statements. Everytime I go to the bank for a loan it’s the first thing they ask for. When I look at my financial analysis the first thing I look at is the figures for the year, I’m afraid I tend to skim over the rest.
    Even after all these years, I must admit there are some parts of the financial statement I am not too sure about. So your article and the information you provide on your site will be very useful to me and many other small businesses. Thanks

    • Renee January 24, 2016 at 8:26 am - Reply

      Hi Peter,

      I don’t think you’re alone in your skimming. I think it’s common to look at certain lines (gross revenue or net profit, sometimes expenses) and forget the rest. After all, if the business is making money, that’s all that matters, right? Often times, it’s not until a business struggles to make money that they start to care about the why. I think it’s important for business owners to understand what’s going on in the financials in good and bad times. In good times, it offers an opportunity to understand what’s going right so they can do more of it and possibly increase profits. It also helps them avoid any adverse experiences that may be on the horizon, as they can catch it through regular analysis. In bad times, it allows them to pinpoint problems and make adjustments.

  2. Michael January 31, 2016 at 9:23 am - Reply

    You bring up many great points in your article about financial statements. I ran into a big problem because I didn’t have the proper paperwork and had to pay a huge amount in taxes. It’s very important to have all your paperwork and to have it in some proper order. You are doing a great service in reminding people how important this is.

    • Renee January 31, 2016 at 6:06 pm - Reply

      Thank you, Michael. One of the big steps a lot of individual miss is going to an accountant when they start a business. Like you, I’ve had individuals tell me they’ve had to pay large amounts to the IRS. In their case, they took for taking “business deductions” the IRS did not think they were entitled to take. An accountant will help a business owner determine what is allowable and what’s not. Having a business doesn’t mean you can write off everything, especially not personal expenses. Again, I stress the importance have keeping business and personal finances separate. Thanks for sharing, Michael.

  3. Molly February 21, 2016 at 5:52 pm - Reply

    For people who have no idea about accounting, this article gives them a good snapshot of what it is all about. I think that the long lists of figures that are on financial statements can be very daunting to look at and can discourage people from paying proper attention to important details, but this explanation is so well written that it makes it much more simple to understand. Thanks for sharing!

    • Renee February 21, 2016 at 10:16 pm - Reply

      Thanks for stopping by, Molly! I agree, financials statements can appear daunting. When I work with clients, sometimes I worry I’m giving them too much. I constantly remind them it’s not a one day project and that it’s okay to break things into small chunks. For example, one might start with the information they know and get the numbers for that one week. The next couple of weeks they might start researching companies they want to work with. Next might come requests for bids/quotes. A series of baby steps can span the same distance as one giant leap.

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