Financial management is something that every business should keep an eye on every minute, particularly for start-ups. One important aspect of accounting for start-ups is preparing financial statements. Understanding the significance of financial statements can help start-ups in the long run.
So, what are the different types of financial statements that every start-up should know about?
Types of Financial Statements
There are 4 most common types of financial statement for a start-up and even for any business. These are:
- Balance Sheets
These play a crucial role in business building process and classify and segregate assets and liabilities that the business owns or owes. Since balance sheets provides an idea of all the assets, liabilities and equity a business holds, balance sheets are often considered as a statement of net worth or financial position.
The balance sheet equation is Assets = Liabilities + Equity.
By maintain balance sheets, start-ups can know about their financial position at any particular time which can be further used to calculate various financial ratios including quick ratio, debt equity ratio, current ration and working capital ratio.
- Cash Flow Statement
Also known as the statement of changes in the financial position, cash flow statement gives start-ups insights on how well they are managing their cash flow. This information enables them to determine if their business is generating adequate cash to meet their debts and operational costs. Start-ups are advised to prepare their cash flow statement on a monthly basis to manage their monthly expenses and avoid unnecessary financial stress. Cash flow statement also helps to avoid redundant expenses. With cash flow statements, start-ups can analyze how much cash they are actually generating from their core operations.
- Income Statement
Income statement is crucial for start-ups because it clearly explains their financial performance over a specific period of time. Income statements are also known as a profit and loss statement or statement of revenue and expense as they show the operating and non-operating expenses and revenue of a business. With income statement, start-ups can calculate financial ratios that offer additional insights on how well the start-up is performing financially.
By preparing these three important financial statements, start-ups can offer important information to prospective creditor or investor. Moreover, these statements can help you identify business performance trends that can further be used to position your start-up at a better position. So, if you’re planning to start your business, include these 3 statements into your financial management plan.