Purpose of Financial Statements

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:

  • Profit & Loss Report (or Revenue Statement and aka Statement of Financial Performance)
  • Balance Sheet Report (or Statement of Financial Position)
  • Cash Flow Report
  • Source and Disposal of Funds Report.

These reports will gives the business owner a better understanding of how the business is doing financially. It would also be the basis for making business forecasts that enable the owner to plan for the future.

Purpose of Financial Statements
Financial statements will help you:

  • Monitor your cash flow requirements.
  • 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 and loss statement or report of earnings or statement of financial performance. 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 business's sales.

  2. Balance Sheet. This is simply a statement of the assets and liabilities that the business has at any particular time. It is also known as a statement of financial position because it shows the position of what the business owns and owes at any time.

  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 financial changes and simply explains how the company acquired its funds/cash and how that was spent.