What Is the Importance of a Company's Financial Statements?
A company's financial statements provide vital information about its financial health. These statements are compiled based on day-to-day bookkeeping that tracks funds flowing in and out of the business. The information the statements provide offers benchmarks and feedback that help the company make minor adjustments and also determine its overall direction. Financial statements are useful for making decisions regarding expansion and financing. They also figure into marketing decisions, providing data indicating which aspects of company operations provide the best return on investment.
A profit and loss statement details how much profit -- or loss -- a business has made during a designated period, once operating expenses are subtracted from overall revenue. The upper part of the statement lists different sources of operating income, such as revenue from wholesale and retail sales, and rental or interest income. The lower part of the income statement lists different categories of expenditures such as materials, labor, rent and depreciation. The most important pieces of information gleaned from a profit and loss statement are whether or not your business is earning a profit, and how much it is earning or losing.
A balance sheet captures the financial health of your business at a particular moment in time. The assets section lists what your business owns, such as cash on hand, money in the bank, and money that is owed to you. The liabilities section lists everything your business owes, such as outstanding principle on loans, unpaid payroll, and unpaid bills. The most important piece of information that a balance sheet provides is your company's net worth, or its value once you subtract liabilities from assets.
A cash flow projection is a document that maps anticipated income and expenditures during an upcoming period. It is an essential planning tool that helps you to anticipate and plan for potential revenue shortfalls by conserving resources or seeking financing. The cash flow projection contains sections detailing categories of anticipated expenditures such as payroll, rent and loan payments, as well as a section listing sources of anticipated revenue such as sales from wholesale and retail operations, and capital infusions from loans. Comparing total anticipated income with total anticipated expenditures tells you whether you can expect to have sufficient operating capital.
Your company's financial statements function in tandem to provide information about the overall health of your company. If your profit and loss statement tells you that you are earning a profit but your balance sheet and cash flow statement show you operating in the red, then you are probably on the right track and it's just a matter of time before you catch up. If your balance sheet and cash flow projection show that you have sufficient capital but your profit and loss statement shows that your business is losing money, you should conserve resources and strategize about ways to begin earning a profit before you run out of money.