What is the purpose of a financial statement?

What is the definition of a financial statement? Financial statements are required by most firms, but they are not the same as the bank statements you receive from your bank.

Financial statements may appear complicated at first, but they will make your life as a business owner much easier since you will have a greater understanding of your company's figures.

Today, we'll look in depth at what financial statements are and how you may use them for free to gain a better understanding of your money.

What is the purpose of a financial statement?

A financial statement, in simple terms, displays a business's or, in some situations, an individual's financial actions utilising data formatted to create a clear summary.

This information can be used to demonstrate a company's financial activity to outside parties such as investors, government authorities, or for tax purposes. It can also assist the business owner(s) in making better and more informed business decisions.

The Importance of Financial Statements

Financial statements show a company's financial health.

They give both internal and external stakeholders a clear picture of what's going on financially in a company. It can, for example, assist investors in determining if a firm will be able to repay a loan based on whether it has the required cash flow.

Investors may decide not to invest in a company if it has a lot of potential concerns.

Along with the balance sheet and profit and loss prediction, a cash flow forecast is one of the most common types of financial statements. They're all critical, but we'll get into more depth about them later.

Investors nowadays demand financial information before investing in a company.

If you don't have financial statements for your company, you might have a few problems, and you won't be able to receive any form of loan. If you haven't begun keeping financial statements yet, we'll go over some of our free templates with you later.

Financial Statements Types

The three primary forms of financial statements, as previously stated, are:

• Accounts Payable

• Forecasting cash flow

• Income Statement/Profit and Loss Forecast

If you're wondering why the third sort of financial statement has two titles, it's because we call it a profit and loss prediction in the United Kingdom. In the United States, however, it is commonly referred to as an Income Statement.

So, if you've ever heard of an Income Statement, a profit and loss prediction is the same thing. Let's look at the different forms of financial statements and how you can utilise our free templates to create them.

1. Accounts Payable

The balance sheet serves as a picture of the company's assets, liabilities, and equity for you and outside parties. Having a glimpse of a company's assets, liabilities, and equity can give you a good idea of how well it's doing and how stable it is.

All companies registered with Companies House are required to submit a balance sheet, therefore keeping one is crucial.

We have a free balance sheet template that you can use if you want to start keeping track of your finances. To begin managing your balance sheet, you may download the template in excel format for free and quickly update it.

2. Cash Flow Predictions

The cash flow projection is the second sort of financial statement.

A cash flow prediction is used to help a company figure out how much money it will have in the future. As you might assume, this is one of the financial statements that investors are most interested in because it helps them determine whether the company has enough cash flow to repay any loans.

Forecasts are usually made for a year ahead of time so that you may compare how your firm performs against expectations in that year. Cash flow estimates can also help you prepare your taxes.

Furthermore, being able to forecast how your firm will perform in the future will make it much easier to make better and more educated business decisions.

Again, we provide a free cash flow forecast template for you to use. You can simply forecast your business's cash flow with this template, which will help you make smarter decisions in the future.

Statement of Profit and Loss

This financial statement is also useful for management choices because it helps you grasp the specific figures within your company. You might believe you're making more money than you are since you're selling your products at a decent profit margin, but if you factor in your overheads, you're actually making a lot less.

The profit and loss statement can help you figure out whether something similar is going on. If it is, you can go back over your management decisions to see how you might make them better in the future.

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