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The financial statements your business produces tell the story of it’s financial health. Even when you outsource the production of your financial statements to a company like Capital Business Strategies, it’s a good idea to understand how to interpret each of them. We discuss four essential financial statements that every business owner should know how to read below. This will prevent you from unpleasant surprises that require you to operate from crisis mode, rather than taking a proactive approach to your company finances.

Balance Sheet

The balance sheet lists all assets and liabilities for your company. This is what it owns and owes. Your company’s balance sheet also needs to list shareholders equity. This is the amount of money left over to distribute to people and businesses with stock in the company. You know that your balance sheet is accurate when company assets are equal to its liabilities and equity paid to shareholders. Many companies opt to create quarterly balance sheets. This is just one of several documents potential investors study before deciding to purchase stock in a business.

Cash Flow Statement

A profitable company can still have difficulty meetings its financial obligations when it has mostly non-liquid assets. Preparing regular cash flow statements can help to alleviate this problem. The purpose of this statement is to compare financial data from two consecutive time periods. The beginning and end of a month is a common example since it demonstrates how assets, equity, expenses, liabilities, and revenue changed from one reporting period to the next.

A detailed cash flow statement divides your company’s cash into finance, investment, and operating cash flows. This enables you to get a clear picture of the net change in overall cash flow for a specified reporting period. It also provides you with a big-picture overview of how much cash your company will have available in the future.

Income Statement

Whether you refer to it as an income statement or a profit and loss statement, this report shows the profitability of your business over time. To prepare this statement, you will need to know the amount of revenue your company has earned for the reporting period. You would then subtract each expense from this figure to show whether you posted a profit or loss. An income statement showing profit or loss for the entire year is necessary to file your annual business tax return. However, you can also create monthly or quarterly reports for your own purposes.

Retained Earnings Statement

You should plan to prepare this statement after you have determined the company’s profit or loss for a reporting period. The retained earnings statement will tell you how much money you have available to pay dividends to investors. The last step is to transfer any retained earnings to your company balance sheet.

Get Help with Your Company’s Financial Statements

Capital Business Strategies in Warren, Ohio can help you prepare these financial statements and more. Part of our service to you is instructing you on how to interpret each of these financial statements for yourself, so you always have a handle on the financial health of your business. Please contact us to learn more.