A company's financial statements consist of the profit and loss statement, balance sheet and cash flow statement. These statements indicate the financial health of the business, and are used by both internal and external stakeholders to make decisions and predictions about the business. The P&L begins with revenues and sales. Expenses are subtracted to arrive at net income. The balance sheet shows the company's assets and liabilities. Any difference is owner equity or net worth.
Lending institutions review a company's financial statements when making a decision to lend money, how much money, at what interest rate and for what collateral. A banker is concerned with how the company has historically performed and the probability the company will maintain that performance throughout the life of the loan. In most cases, a small-business owner will have to personally guarantee the loan to the business, even if the business is a separate legal entity such as a corporation or limited liability company.
Very few companies qualify and receive funding from venture capital firms, only about 4,000 per year, according to Pricewaterhousecooper.com. Venture capital firms will review the historical financial statements to see how well the company has performed and to judge the strength of the management team. Unlike lenders, a venture capital firm is interested in the company's future because the firm expects a high return on its investment -- up to 10 times or more -- not just the principal paid back and money earned from interest. Angel investors, also called private investors, review the financial statements for the same reasons.
Every owner should review the company's financial statements on a monthly basis. Shortfalls in revenues, as well as expenditures above projected budget levels, should be addressed. That combination -- low revenues and high expenses -- can be deadly in the long run. Department managers review their own department's P&L. Chief executives and chief operating officers review the P&L for each department as well as the company P&L and balance sheet.
The Internal Revenue Service doesn't review company financial statements, but the information on the profit and loss statement is incorporated into the company's tax returns. Most state governments require company tax returns to be filed as well. If the company is publicly owned, the statements have to be reported on a quarterly and annual basis to the Securities and Exchange Commission.
The annual report, which includes the profit and loss statements and balance sheet, is sent to the stockholders, also called shareholders, of businesses that are set up as corporations.
