There are many reasons why a business may need or want financial statements. Unfortunately by the time a business contacts their accountant or CPA it is often not just a want but a pressing need. This may be because there was a request from an investor or bank that is willing to give a loan. There may be a limited window of opportunity that must be met in order to get the financing requested.
So let’s digress to when a business has no pressing need then lets answer why they would have financial statements?
Financial statements can be used to gauge the financial health of he business in many ways. Standard financial statements have three components and each one can help assure a different aspect of the financial health of the business. After all you would not want to go to a doctor if he was limited to performing only one test.
The first component of a set of financial statements is the balance sheet. The balance sheet shows the assets, liabilities and net worth of the business. There is a familiar formula that accounting students know that explains how the balance sheet remains in balance. Briefly though the balance sheet will result in the owners knowing the equity in the business. So if they began by investing $ 100,000 in the business and the equity is higher or lower than they know how much they have progressed and where they stand now.
The second component of the financial statements is the income statement. This shows for a period of time if there was a profit or loss. Depending on the type of business this may be completed in a single or multi step format.
The last part is the Statement of Cash Flows. As the name states it shows how the business has been affected by cash and if their cash position has been improved or not.