A Business Owner’s Guide To 5 Vital Financial Documents
When entrepreneurs start a new business, most of their time and energy is spent on the daily outward-facing operations of the enterprise, such as sales, inventory management, and customer services. However, what is equally significant to long-term business growth and success is to have a profound understanding of the business’s finances.
There are numerous financial documents that can provide business owners with insights into the past, present, and future financial state of their companies. If you are a business owner, it is vital that you have an annual report of this financial information, as it will enable you to run your company more effectively. Read on to learn five of the most critical financial documents you should be aware of as a business owner.
1. Cash flow statement
The cash flow statement is a summary of all the business’s cash inflows and cash outflows over a period of time. In other words, it takes into account the business’s cash activities but does not consider non-cash activities, such as purchases on credit or sales.
Regularly evaluating your cash flow statement is necessary, as it helps your business stay on track. This statement is more like a budget utilised to forecast revenue in and expenses out over a certain period (usually three years). It helps you plan your day-to-day and long-term investments and lets investors and lenders know your business’s cash position.
2. Profit and loss statement
The profit and loss statement is a summary of all the revenues the business generated and all the expenses it incurred over a certain period of time. It is also sometimes called an income statement and is used to examine the business’s current financial conditions and potential for growth.
The profit and loss statement is typically used by the business’s internal stakeholders, such as the board of directors, and external stakeholders, like investors and lenders, to analyse the business’s profitability and help evaluate the level of risk for an investor or lender. For your company to be viable and valuable, your revenues would essentially need to exceed expenses.
3. Balance sheet
The balance sheet summarises the business’s overall assets, liabilities, and shareholders’ equity at a particular time, often at the end of an accounting period. Like the profit and loss statement, the balance sheet provides an overview of the business’s financial position, including the economic resources it owes and owns and the sources of financing for those resources.
It is necessary for every business owner to know about the balance sheet, as it can be used to recognise trends and make more informed decisions regarding financial accounting. The balance sheet is also important to investors and lenders since they can use this financial statement to determine the creditworthiness of a business.
4. Aging report
An aging report, also known as accounts receivable/accounts payable, is a categorisation of all the debts owed to the business, including how long the debt is owed. The term ‘accounts receivable’ refers to the funds owed to the company, whereas the term ‘accounts payable’ refers to those funds the business owes to others.
An aging report helps you identify how many of your business’s accounts receivable are already overdue and how old they are so that you can make the necessary follow-ups and bring in the money. Conversely, if you have overdue debts, this acts as a signal to make your necessary payments. You can hire accounting services or communicate with your in-house certified public accountant (CPA) in order to better manage your business’s expenses.
5. Tax returns
Most entrepreneurs should be familiar with tax returns prior to even launching their businesses since they would have had to file them as individuals – this type of tax is called ‘personal tax’. On the other hand, the type of tax chargeable to a business is known as ‘business tax’. When you operate a business, keeping up with your personal and business taxes is essential since you can be liable for them separately.
The tax form you need to file depends on the type of your business, and various income tax consequences apply to each. Most of the time, business owners hire in-house tax professionals or outsource the services of an accounting firm in Singapore to file their business taxes. That said, it is crucial for you to review your tax returns, as it can help you develop growth strategies that can lead your business to success.
The abovementioned financial documents are what you need to understand as a business owner if you want your company to run smoothly and successfully. With accurate and updated financial documents at hand, you can easily find development opportunities for your business and spot problems that may be draining your resources. In addition, maintaining and understanding these documents prepares you for the vital conversations you may have with potential investors and lenders.
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