At their core, your business’s financial statements are a list of information that ensures your company’s bookkeeping services are being held to the highest standards of accounting. But do you know how exactly your tax preparers and investors look at these different statements, and what they use them for?
Unless you are a CPA working with a client on assurance, you typically do not. But that’s why it’s important to learn more about how each part of your company’s financial statements work and the importance of the information that it presents, so we’re going to show you just how you can do that.
The Balance Sheet and Your Current Investors
Your company’s financial conditions are a major concern to both your creditors and investors. They are your sources of finances for all your company’s operations, and they use business financial statements to gauge the conditions for their investment’s safety and profitability towards your company. Simply put, they need to know where their money went and where it is now.
Your business’s balance sheet is the answer to that question for your investors and creditors which is what makes it such a valuable financial statement. It provides detailed information about asset investments and lists outstanding debt and equity holdings which helps your investors to better understand their relative positions in your company’s mix of capital.
Therefore, your balance sheet can help to create a transparent relationship between you, your investors, and creditors by showing them exactly how their stake in your company is benefitting them and what is coming out of their funding, if anything.
Analysts, Operating Results, and Financial Conditions
A balance sheet gives the financial conditions of your company. CPAs like to think of these financial conditions as snapshots of your company’s assets, liabilities, and equity.
The only issue that your investors might run into with this list of financial conditions is that they are only a glimpse into the state of your company because they only take into account the end of the financial reporting period. They don’t reveal any other information about your company’s financial conditions outside of the end of that financial period. So, any events that have occurred outside of that ending period date may not be taken into consideration. That is where the analysts step in to help you figure out where your company’s heading into the coming year based on the conditions and the operating results of your company.
Your company’s operating results contain details that relate to the daily organizational transactions. This includes reports on sales, expenses, profits, and losses which helps analysts and investors alike to create a fuller picture of your company’s financial health by evaluating past income performance and future cash flow when paired with the financial conditions. So, if you want to get a clear idea of where your company is heading, you need the business operations results as well as the financial conditions laid out in your financial statement to get a good answer.
The CPA, Cash Flow Statement, and You
Your cash flow statement shows the exact amount of cash that is being exchanged between a company and platform during a certain period of business, much like your company’s financial conditions. When deciphered, the cash flow statement can let you and your investors know if your business has enough money to pay for their expenses and asset purchases, and it can also give you an idea of your customer base. By looking at exactly how much cash is coming in and out of your business you can figure out which aspects of your business are bringing in the most profit. Furthermore, this gives you an idea of where you need to be marketing and to what group of consume to target with your advertising budget.
However, it is worth noting that the profits of your company that is shown in these cash flow statements can be difficult to interpret. They most likely contain several non-cash elements as well which can muddle the accuracy of the information on a company’s cash exchange during the end of the financial period. Thankfully, a certified accountant can work with you directly to make better sense of your cash flow statements by offering you their assurance services which will further provide more concise insight into the cash flow of your company for you and your investors.
Shareholder’s Equity and Your Account Management
A simple formula for shareholder’s equity in your company can be found by subtracting your company’s total assets from the total liabilities. This represents the company’s net worth which can further track the growth of your company.
When reviewing your company’s financial statements, account managers like to look for steady, continuous growth in shareholder’s equity, and one of the big ways that they do so is through looking at the increase in retained earnings as opposed to a reduction in this number which indicate a loss for this period.To an accountant, increased accumulation of your shareholder’s equity means your company is likely to see a greater investment on returns—even if you do not have many shareholders, to begin with. Therefore, the statement of shareholder’s equity is important to account managers and investors alike because it shows the changes in various equity components, including retained earnings and company net-worth, during the financial year.
How a CPA Can Help You Understand the Bigger Picture for Your Business
Here at RiverRidge CPAs, our team of certified accountants, bookkeepers, and tax preparers are all here to help your Tennessee business grow by looking at the whole picture of your financial statements. With our review and compilation assurance services, we can help provide credibility and legitimacy to your company’s financial picture, and objectively present the information to you which allows you and your stakeholders to make the right decisions for your business’s next move. Visit our website today to learn more about how our accounting firm can help you make the most of your business.