Other than compliance requirements Financial Statements show the historical financial health of an organisation, its current performance and any opportunities for growth. Stakeholders interested in the financial health of an organisation are investors, creditors, shareholders and the government agencies.
Three primary financial statements: the balance sheet, the income statement and the cash flow statement.
The balance sheet entails assets including everything of value that a business owns or is owed, and liabilities are what a business owes. Owner’s equity — the balance left over after you subtract liabilities from assets — is the owner’s share of the business. The income statement shows the profitability, or lack thereof, of a business over a set period. The cash flow statement converts finances from accrual basis to cash basis and measures the flow of cash in and out of the business.
Accurate Financial Statements aids management in decision making, they provide historical records for making future business decisions. During the budgeting process they are used to plan and control any expenditure that might have adverse variances from the budgeted amount.
Managing Working Capital
Generating payables and receivables age analysis results in improved working capital, since these reports show which receivables and payables are overdue. To maintain a high credit score there should be a balance between receivables collection and paying off bills within their credit terms.
Businesses often need credit as a part of their strategy to remain financially viable. When applying for a loan, credit card and credit terms, the lender will ask to see a balance sheet and run a credit report in order to decide. A balance sheet will show a creditor how much debt an entity has, how much money is flowing in and out and if there is any growth in equity.
Financial statements are used to calculate company income tax. A sales report that separates taxable sales from non-taxable sales will give out the information needed to pay VAT collected from customers. A payroll liability report will outline all payroll-related obligations.
Different stakeholders use financial information for different uses. Sometimes management can be tempted to understate or overstate financial information to suite the relevant use case, which is inappropriate .
Through appropriate design of a finance environment, and proper planning, a consistent set of financial records can be kept to suite all needs of an organization