Did you know that your bank’s financial statement is very important? So if you were to be asked this question: what is the importance of a financial statement, what would you have answered? Anyways in case you don’t know, you will learn its importance in this article today. So let’s run it together. But before we start, let us first look at the meaning of the financial statements.
What Is a Financial Statement?
A financial statement is a document that gives a summary of all financial transactions of a person or an organization within a period of time, which may be or less depending on the firm. The financial reports of the financial position of the company help them to forecast their future business sales. Financial statements give a summary of all financial data such as:
- The income,
- The expenses,
- And the profit/loss.
The Importance of Financial Statements – Explained
We are going to explain the importance of financial statements in four categories. Below are the four main types of financial statements that are popular in business:
- Income Statement
- Statement of Retained Earnings
- Cash Flow Statement
- Balance Sheet
The income statement: This is a statement or report that shows data on how much a company earns within a specific period of time, this could be a year depending on the company. But it is usually a year. This financial statement is a type of financial statement that helps a company to know if they have maximized profit or not.
The income statement must include the following:
Revenue of the company. That is the money realized by the firm from either sales or other means within a given period.
Expenses of the company. That means the costs incurred by the company within a particular period of time.
Statement of Retained Earnings
The statement of retained earnings: This type of financial statement is used when the company wants to determine how much or what exactly it can reinvest back into the company.
The amount of profit that is left with the company after dividends are paid out to investors and shareholders, is what is referred to as retained earnings. On the other way round, it can also be referred to as a statement of changes in shareholder’s equity.
A balance sheet: when a company wants to find out if the company’s assets are equal to its liabilities, it will go for the balance sheet of the company. It is in the statement, that the organization will determine what their financial worth is.
The organization’s balance sheet is divided into two columns:
The side of the liability: This is always on the left side of the statement of account. liabilities means those things that the company owes to others.
The side of assets: This is always on the right-hand side of the statement of account. Assets are the things owned by the business.
whereas the Liabilities may be owed to other businesses, suppliers, lenders, employees, or customers. At the end of the account, the balance sheet must be equal, so that the left and right sides of the account have to be equal.
Cash Flow Statement
The cash flow statement: This can also be referred to as the cash flow projection. This type of statement of account is required when the organization wants to know how the company’s revenue is flowing into the firm and how their funds are flowing out of the business. The cash flow type of statement is on track and it will be able to fend for all its expenses. There are three parts of the cash flow statement, they are as follows:
- The operating activities,
- The investing activities,
- And the financing activities.
Importance of Financial Statement
Why is it very important for you to have a financial statement of your organization at the end of the year or a specific period of time that you have set for your organization?
Importance of financial statements in decision-making:
when you have your financial statement at hand, it will help you to make the right decisions because you know the earning of the company whether they are making more money or not. they will know which area they are to invest their money in and where not to.
The Need for Financial Statements to the Tax Authority
Knowing your financial statement will help you to know the tax return with the inland revenue authority of the country where your company is situated.
Financial Statements Help You Cut Costs
With your financial statement, you will be able to identify where you have a bottom line, and where unnecessary costs are coming from and be able to do away with it. If for example, a particular tool was too expensive, you can as well look for an alternative tool for that.
Financial Statements Allow You to know the worth of the firm
Since you see a bigger picture of the firm through the financial statements of the company, it will then help you to create smarter goals and initiatives, whether short or long term that will be more beneficial to the company.
Financial Statements and Lending Institutions
It will be easier for financial institutions to grant your company a loan if they see your Financial statements and know the debt load, it will help them to know your financial status and help you know if you are operating at a profit or not, and you can make adjustment where necessary.
The Importance of Financial Statements to the Shareholders
The financial statement of the firm will help the shareholders to know how the company has been running and at the same time try to forecast the future performance of the company.
If you have a business be it a big or small firm, it is important for you to carry out a financial statement of the company either yearly or as you deem it fit. This will help you to understand the financial position of your company. Your financial statement will also encourage investors to come and invest in your firm.