Guide to Business Financial Statements
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What Are Financial Statements?
The balance sheet provides an overview of assets, liabilities, and owner's equity as a snapshot in time. The income statement looks at revenues and expenses and gives you the company’s “bottom line” during a particular period. The cash flow statement acts as a bridge between the income statement and balance sheet by showing how money moved in and out of the business.
How Do Financial Statements Work?
3 Key Financial Statements
1. Balance Sheet
What It Includes
Assets This lists what your business owns of value that can be converted into cash. It includes current assets (those that can easily be converted to cash within a year or less) and long-term assets (those that won’t be converted to cash within a year). Liabilities This is money that you owe to others, including your recurring expenses, loan repayments, and other forms of debt. Liabilities are broken down into current and long-term liabilities. Shareholders' equity Also called owner's equity (for sole proprietorships), this includes the amount of money generated by a business, the amount of money put into the business by its owners/shareholders, and any donated capital.
What It Tells You
Example
2. Income Statement
What It Includes
What It Tells You
Example
3. Cash Flow Statement
What It Includes
Operations This includes money earned from the products or services the company provides, as well as the money it spends to produce these products or services. Investments This includes the returns the company gets on money it has invested and the cash it spends to acquire and manage these investments. Financing This refers to the money the company has coming in from the debt it uses to finance its operations, as well as the cash it spends on this debt.
What It Tells You
Example
Pros and Cons of Financial Statements
Pros of Financial Statements
How much and how your business generates revenues What the cost of doing business is How efficiently your business manages its cash What your business’s assets and liabilities are Whether your business has the capability to pay back its debts
Cons of Financial Statements
They’re based on past data. Because financial statements are based on historical data, they don’t provide information on the company’s current situation. Information may be biased. Financial statements aren’t completely scientific. Because some areas are open to interpretation, a business may be able to make their financial picture look better than it really is. They don’t tell you everything. Financial statements only include aggregate information, so they don’t give you all the details. Plus, they only provide quantitative information. They don’t reveal any qualitative information, such as the company’s relations with its suppliers, behavior of top management, or morale of employees.
The Takeaway
3 Small Business Loan Tips
Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders. Traditionally, lenders like to see a business that’s at least two years old when considering a small business loan. If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.
Frequently Asked Questions
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