The Importance of Having Financial Statements

importance of financial statements

You can’t improve what you can't see. The adage applies to life, as well as business. And when it comes to business, there are no documents more important than financial statements.

Today, we’ll take a look at the importance of financial statements, both in terms of decision making and shareholder communication.

Let’s see how financial statements can help you!

What Are Financial Statements?

Financial statements are documents that show how your business is doing financially and operationally. You’ll normally come across them in accounting, but they can offer incredible insights for operations, too.

Financial statements are normally broken down into 3 categories:

  • Balance sheet
  • Income statement
  • Cash flow statement

What Is a Balance Sheet?

A balance sheet is a financial statement that reports your company’s assets and liabilities, as well as shareholders’ equity. In short, your balance sheet shows you how much money you’d have left over if you liquidated (sold) all your assets and paid off your debts.

What Is an Income Statement?

Your income statement reports your company’s profits and expenses. Ultimately, it shows whether you’re making profit or operating at a loss in a specific period.

What Is a Cash Flow Statement?

A cash flow statement quite simply shows how cash flows into your business (revenue) and how it flows out (expenses, losses). Its purpose is to show you where you make money, and how you spend it. This is really important for reducing your expenses and maximizing your revenue.

The Importance of Financial Statements in Decision Making 

Financial statements are necessary for assessing the financial health of your business. They allow you to make smarter decisions because you can clearly see how you make money, and which initiatives are profitable. At the same time, you’re also able to see where your money goes in terms of expenses and losses.

In the long term, this means...

Financial Statements Improve Your Budget Allocation

Let’s say your goal is to increase revenue in the upcoming year. Financial statements can show you where most of your revenue is already coming from, and which revenue channels are set to grow.

When you analyze the trends, you’ll see which channels are worth investing in.

Financial Statements Help You Cut Costs

When you can see all the elements that contribute to your bottom line, you can identify unnecessary costs.

For example, you might be spending too much on a particular tool. If you want to reduce your expenses, you can find a more affordable alternative.

Financial Statements Allow You to See the Bigger Picture

Since financial statements show you the health of your business, you’ll be able to create smarter goals and initiatives that will pay off in the short and in the long term.

The Importance of Financial Statements for tenders and government grants

Some external stakeholders like your customers may request for a copy of your financial statements to access your Company's financial standings. This practise is quite common in the construction and renovation industry and high weightage is given to financial assessment.

 When applying for government grants, financial statements is a vital part of the evaluation process on the amounts and the conditions to be attached to the grants

The Importance of Financial Statements to the Tax Authority

When filing tax returns with the Inland Revenue Authority of Singapore, IRAS, it is important to have your financial statements handy as IRAS can request for a copy of financial statements and all accounting records of the Company during its tax assessment and review

Is Your Business Worth the Investment?

Only your financial statements can say!

Shareholders primarily look to financial statements to see long-term profitability. In addition to your business’ revenue, they care about debt load, assets, and your company’s ability to handle financial obligations.

This is particularly important to investors. They want to know how much they could be making from the investment. If your business’ financial health is top-notch, they’ll be more likely to invest.

With financial statements, investors and shareholders will be able to calculate their ROE (Return on Equity), and vote for better decisions.

Financial Statements and Lending Institutions

Financial statements also show debt load, which is incredibly important to lending institutions, as well.

If your financial statements show that you can meet your financial responsibilities and operate at a profit, they’ll be more likely to finance you.

Financial Statements: Achieving Short and Long-Term Goals

Ultimately, financial statements allow you to fully understand how your business is doing. They will help you make smarter decisions regarding revenue, expenses, assets, and losses. You’ll easily see new initiatives that could help you grow your business, and identify all the ways your money flows out of your company. (Often, the costs are unnecessary).

At the same time, financial statements help investors, other shareholders, and external parties decide if your business is worth investing in.

So, the sooner you get to analyzing your financial statements, the better!

 
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More questions?

Schedule a call with Sprout for a complementary consultation. We can provide insights on how we can add value by providing more insight into your business' financial performance and cash flow, allowing you to make better decisions.

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February 10, 2021

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