Financial Statements and Accounts

What are Financial Statements?
Financial statements relate to the various financial reports that are completed from the financial data contained in the accounting system of the business.

The reports are usually completed by an accountant and consist of 4 main reports:

  • Revenue Statement (or Profit and Loss Account)
  • Balance Sheet
  • Cash Flow Statements
  • Source and Disposal of Funds statement

The financial statements will give you a better understanding of how your business is doing financially and can be the basis for making business forecasts that enable you to plan for the future.

Purpose of Financial Statements

Financial statements will help you:

  • Monitor your cash flow requirements
    " Financial statements reveal how your business is doing ..."

  • Monitor your business profitability as well as the indicators of your business financial health (e.g. profitability ratios, liquidity ratios, solvency ratios, efficiency ratios etc)

  • Highlight unfavourable areas in your business operations that require attention (e.g. the collections of your debtors are slow or entertainment expenses of your business are too high etc)

  • Monitor any increases or decreases in your business wealth

  • Monitor your actual business performance when comparing actual results with your financial plan

Importance of Financial Statements
Having a good understanding of financial statements is vitally important to the success of any small business. The financial statements can be used as a pointer towards the journey of your business to arrive at success.

Financial statements have a far greater value than simply the enabling of tax returns to be prepared or for information to be sent to lenders to the business. Statements will contain figures and ratios which will help you to steer your business in the right direction. This will help you avoid any unnecessary, costly expenditure.

Types of Financial Statements
There are 4 basic types of financial statements.

These are:

  1. Revenue Statement.
    Also known as a profit & loss account or statement of financial performance or report of earnings. It tells you and your investors what profit the business has made, the expenses and income the business generated and the costs involved in generating the sales that the business has.

  2. Balance Sheet.
    This is simply a statement of the assets and liabilities that the business has at any particular time. Also known as statement of financial position

  3. Cash flow Statements.
    This shows the flow of cash in and out of the business.

  4. Source and disposal of funds.
    This is also known as a statement of changes in a financial business and simply explains how the company acquired its cash and how that cash was spent.