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  • Hemlock Business Solutions

Understanding the Importance of the Financial Statements

Updated: Jun 10, 2023

If you’re like most business owners, you understand your industry like the back of your hand, but may not know the specifics about financial statements. Financial statements are one of the primary drivers of business success, leading to stronger controls over operations, performance, and cash flow.

Understanding the basic financial statements, the effects of foregoing consistent generation, and the benefits of working with an expert gives your business a baseline to make informed business decisions surrounding growth and scalability

What are the Basic Financial Statements?

There are four basic financial statements: the balance sheet, income statement, statement of equity, and statement of cash flow. Businesses see the most insight from viewing the balance sheet and income statement on a regular basis. Each of these statements measures a different component of your business’s financial health including:

  • Balance Sheet – This statement tracks all the money your business owns, owes, and has earned. There are three main categories: assets, liabilities, and equity. Common assets include cash, accounts receivable, inventory and fixed assets while liabilities can be accounts payable, wages payable, and outstanding debt. This statement tracks working capital and liquidity.

  • Income Statement – The income statement tracks all the money you have earned for a certain period, which can be monthly, quarterly, or annually. This statement gives insight into how profitable your business is with every revenue stream and operating expense being laid out.

  • Statement of Equity – The statement of equity outlines the money your business has earned in the past and current year, along with any contributions or distributions that owners have taken.

  • Statement of Cash Flow – This statement tracks changes in the checking account by outlining cash transactions from operating, investing, and financing.

What are the Effects of Skipping Regular Financial Statement Generation?

Skipping regular viewing of these financial statements can be detrimental to your business. Regular report viewing promotes accuracy in your books. By neglecting the financial statements, errors can go undetected, which leads to misreporting income on important forms, like your tax return. The IRS is not very lenient when it comes to misstating income.

Asset misappropriation and fraud can also go undetected without prioritizing the financial statements. Every business, regardless of size, faces a risk of fraud when proper controls and safeguards aren’t in place. Furthermore, business growth is easier when you have transparency into your business’s financial health and cash flow. With accurate and updated financial statements, your business can make more informed decisions to achieve its operating goals.

What are the Benefits of Working with an Expert?

Financial statements can be tricky. From knowing where to categorize each expense to understanding what each line item tells you, having an expert working alongside you is advised. Working with an expert, like Hemlock Business Solutions, not only gives you access to an independent third party to add another layer of fraud prevention, but they can also help you understand what your financials are telling you.

In addition, financial statement comprehension is vital to properly prepare for tax season, budgeting, and business growth. Guessing about an important business decision is a risk that you want to avoid. Instead, working with a professional can ensure you are generating accurate financial statements that guide you throughout the decision-making process.

Financial statements are the backbone of most successful companies, giving insight into strategic goals and growth opportunities. Deriving useful information from your financial statements doesn’t have to be a daunting task. Instead, reach out to one of our team members today to see how we can help you take control of your business’s financials.

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