If you are new to financial reporting, then it can be overwhelming to see all those numbers that especially tell the financial health of your company over a specific period of time. The company results strategically formed into a report or statement is vital for the management for making important decisions about the enterprise’s future. Most importantly, the company results provide information to investors and capital providers about the financial stability and profitability of the enterprise.
Knowing how to work with numbers in company financial reports is an essential skill for business owners and investors alike. Irrespective of that, this isn’t something that they look forward to doing. Being unfamiliar with the terminologies and factors to consider can cause a lot of hassle with your business finances.
With that said, here are 7 essential things you need to know about financial statements that directly affect your company results.
#1 There are Four Types of Company Annual Reports
First things first, there are four basic company financial reports that you should understand. They are:
- Statement of Cash Flows – This is the report you create taking into account the incoming and outgoing cash from financing, investing, and operating activities
- Statement of Owner’s Equity – Ending Equity = Investments + Beginning Equity – Income + Withdrawals
- Net Income – Income Statement = Expenses – Revenue
- Balance Sheet – Assets – Equity + Liabilities
#2 Each Financial Statement Tells Something about Company Results
The primary reason why there are four different types of statements in company financial reports is that each one has a distinct narrative to tell, containing different combinations of data and information. This can provide you with unique insights.
- Statement of Cash Flows – it tells how money is moved around in a specific timeframe
- Statement of Owner’s Equity – it shows any changes in the equity for a specific period
- Net Income or Income Statement – it represents how much money is coming into a business during a given time
- Balance Sheet – it tells the financial health/position of an enterprise at any given time
#3 Financial Reporting is Accepted by GAAP
Generally Accepted Accounting Principles or GAAP are models that supervise how corporation results are recorded, examined, and prepared. The company report you create will be based on GAAP standards, which is regulated by the Financial Accounting Standards Board.
#4 Financial Reports are Full of Jargon
The primary reason why obtaining company results through financial reporting is that it is filled with jargon. You are advised to take your time in understanding each type of statement and learn the key terms.
#5 Financial Reports Lack Vital Context
The objective of financial statements is to demonstrate how an enterprise is performing. However, it fails to record the vital context that influences your reports. This includes the quality of workers/employees, market forces, competition, industry, and economy, among other things.
#6 Financial Reports Demonstrates Real-Life Events
Each figure calculated in a financial report represents a real-life event for your business. This includes getting a loan, selling services or products, or purchasing supplies.
#7 Financial Reports can Enhance your Corporate Strategy
The information gathered using financial reporting can significantly help you plan your business for future operations.
Therefore, understanding your business financial reports and analyzing the numbers is crucial for the growth of your business.