What is a Financial statement? Most businesses require financial statements, but not the usual bank statements that you would get from your bank.
Although financial statements may seem a little complicated at first, they will make your life as a business owner much easier, because you will have a much better understanding of the numbers for your business.
Today, we are going to take a detailed look at what financial statements are and how you can start using them for free to get a better understanding of your finances.
What is a Financial Statement?
In simple terms, a financial statement represents the financial activities of a business or, in some cases, an individual using data structured to create a clear overview.
This data can be used to show the financial activity of a business to an outside party such as investors, government agencies, or for tax purposes. Or, it can also help the business owner(s) make better and informed decisions for the business.
Why Financial Statements are Important
Financial statements display the financial health of a business.
They provide a clear overview of what’s going on financially inside of a business to both internal and external parties. For example, it can help investors understand whether a company is going to be able to repay a loan depending on whether it has the needed cash flow.
If there are many potential problems with a business, investors may choose not to invest in it.
A cash flow forecast is one of the main types of financial statements, alongside balance sheet and profit & loss forecast. They’re all extremely important, but we’re going to talk about these in detail a little later on.
Nowadays, investors require financial statements before they will invest in a business.
If your business does not have financial statements, you might just run into a couple of issues, and you will definitely not be able to get any type of loan. If you haven’t started keeping your financial statements, we will talk you through some of our free templates later on.
Types of Financial Statements
As already mentioned a little earlier on, the three main types of financial statements are:
- Balance Sheet
- Cash flow forecast
- Profit and Loss forecast/Income Statement
In case you are wondering why the third type of financial statement has two names, it’s because, in the UK, we call it a profit & loss forecast. However, in the USA, it is often called an Income Statement.
So, if you have ever heard of an Income Statement, it’s the same as a profit and loss forecast. Let’s take a look at what the different types of financial statements are used for and how you can use our free templates.
1. Balance Sheet
The balance sheet is there to give yourself or outside parties a snapshot of the business’s assets, liabilities, and equity. Having a snapshot of the assets, liability, and equity is an excellent indication of how a company is performing, as well as the stability of a business.
Keeping a balance sheet is essential, as it’s required to be submitted by all companies registered at Companies House.
If you would like to start keeping a balance sheet, we have a free balance sheet template that you can use. You can download the template in excel format for free and easily edit it to start keeping your balance sheet.
2. Cash flow Forecast
The second type of financial statement is the cash flow forecast.
A cash flow forecast is used to help a company find its future bank balance. As you might expect, this is one of the financial statements that investors are generally interested in, as it gives them a better understanding of whether the business has the needed cash flow to pay back any type of loans.
The forecasts are typically for one year ahead so that you can compare how your business is doing in that year against the expectations. Cash flow forecasts can also be useful for your tax preparations.
Plus, if you’re able to predict how your business is going to be performing in the future, it’s going to be a lot easier to make better and more informed decisions for your business.
Again, we have a cash flow forecast template that you can download for free. Using this template, you can easily forecast the cash flow of your business, which will help you make better decisions in the future.
3. Profit & Loss Statement
Finally, there is also the profit & loss statement.
This is also a helpful financial statement for management decisions, as it helps you understand the exact numbers inside of your business. Often, you might think that you are making more profits than you are, because you are selling your products at decent margins, but after taking into account your overheads, you are making a lot less.
The profit and loss statement helps you identify if something like this is happening. If it is, you can then review your management decisions to improve them for the future.
Just like with the other financial statements, we have an excel profit and loss statement template that you can download for completely free.
This template will make it easy for you to calculate your:
- Total sales
- Cost of sales
- Gross profit
- Net Profit/Loss
Using these figures, you will be able to gain much better insight into the real numbers inside of your business.
Frequently Asked Questions Around Financial Statements
Lastly, I just wanted to cover some frequently asked questions regarding what is a financial statement.
What is the difference between a financial statement and bank statement?
A financial statement provides you with a much clearer overview of how your business is doing compared to a bank statement.
Bank statements just have your transactions listed, which makes it incredibly hard to see how your business is doing. Investors will always require certain financial statements instead of bank statements for this reason.
Plus, if your company is registered at the Companies House, you are required to submit certain financial statements.
What is the difference between a Balance Sheet and Profit Loss Statement?
The balance sheet provides a snapshot of how a business is doing at one given moment. It provides insight into the assets, liabilities, and equity of a company. The profit and loss statement provides insight into how much profit (or losses) a company is making over a period of time, usually one year.
In simple terms, the balance sheet is more of a snapshot, while the profit & loss statement is more of a video over a longer period of time.
When Should a Business Prepare Financial Statements?
There are a couple of times where a business should prepare financial statements. For example, the government may request access to financial statements of a company for tax purposes. Usually, businesses will also prepare financial statements for their results at the end of the year, but this depends on the size of the business.
Another example of when a business might prepare financial statements is when looking for investors.
To read more about What is a financial statement read our accounting basics section.