Have You Prepared Your Most Recent Annual Financial Statements?
Preparing the financial statements of your business might not be your favourite part of doing business, but it is a crucial part of operating a business. By preparing your financials and analysing your financial data, you can understand the big picture (part of a financial year or the entire year) and avoid making uninformed decisions.
We prepare our clients’ annual financial statements using information from their monthly management accounts. These management accounts are primarily prepared using bank statements and source documents, including receipts and invoices.
The financial statements are mainly made up of the income statement, the balance sheet, and the statement of cash flows, among other disclosures and statements.
The income statement, also known as the profit and loss statement, is almost uniquely important because it shows the overall profitability of your company for the period in question. It shows revenue from the sale of the company’s products and/or services, gains on sales of equipment and interest income. The income statement also shows the business’s expenses which includes operating expenses and losses from any activity, including depreciation. One thing to note about the depreciation shown on the income statement is that it only accounts for the depreciation over the period in question, not the total depreciation of an item from the time the asset was acquired. The bottom line of the income statement is net profit or income. The net profit is either retained by the business for growth purposes or it is paid out as dividends to the business’s owners and investors.
Balance Sheet or Statement of Financial Position
The balance sheet indicates the business’s financial position at any given time, usually the last day of the accounting cycle. This statement shows what you own (assets) and what you owe (liabilities and equity). Your assets must equal the sum of your liabilities and your owner’s equity.
Statement of Cash Flows
A statement of cash flows is just as important as an income statement and balance sheet. This is because even if your business is turning a profit, it may be falling short because you do not have sufficient cash flow. The statement of cash flows compares two time periods of financial data and shows how cash has changed in the revenue, expense, asset, liability, and equity accounts during these time periods. This statement is prepared last as it takes information from the previously prepared statements. The statements of cash flows is divided into operating cash flows, investment cash flows, and financing cash flows. The result is the net change in cash flows for a particular period and gives you a comprehensive picture of the cash position of the business. Overall, the statement of cash flows shows the business’s financial position on a cash basis which provides a record of cash received and cash paid out.
Financial statements or a form thereof (management accounts) can be prepared at any point in time and for any length of time. Some businesses prepare management accounts monthly to keep a tight handle of the financial position of their business, while other businesses have longer accounting cycles (e.g. quarterly or annually). Nevertheless, it is important to remember to prepare financial statements on a yearly basis.
If you need support with preparing your annual financial statements, contact us for a no obligation discussion.