Your financial statements show your company’s performance and ability to generate value for you and your stakeholders. It is imperative for every founder to have at least a passing acquaintance with financial statements as they are used to measure a company’s health by various stakeholders. Below are the four types of financial statements, each providing specific information about your company:
Income statement presents the performance of your company over a particular period - month, quarter, or year- measured by three main profit margins-gross profit margin , operating profit margin & net profit margin. It can be presented either based on function or nature of expense, whichever is more aligned with your company's business model. This is the key statement for you to assess your cost centres and to measure the impact of your efforts on your company’s performance.
Balance sheet a.k.a the statement of financial position, shows the snapshot of assets, liabilities and equity of the company on a particular date presented in the order of liquidity. Your balance sheet reveals information about your liquidity and how your assets are financed. Certain expenses like investments in fixed assets, research and development, patents, software development, etc can be capitalized in the balance sheet thus spreading the impact of these expenses on the annual profit over upcoming years.
Cash flow statement reports the generation and utilization of cash over a particular period; usually, a financial year, presented under three activities - operating, investing, & financing. Cash flow statement along with the balance sheet helps you to assess the financial health of your company and help to calculate the burn rate. Cash shortage is a major problem faced by start-ups, and keeping an updated cash flow can predict future cash flow issues, so that you can plan in time for the near future.
Statement of shareholder’s equity reports the owner's fund - what company owes to its owners - as on a particular date. Profits, capital reserves, and share capital are all part of this statement. In effect, it is the net of assets and liabilities of your company and hence comparisons with the previous years can help you to gauge how well the business is doing .Although this statement is not very popular with stakeholders compared to other reports, it helps to assess whether the company has financing leeway.
Notes to accounts and other ancillary statements should also be prepared based on your stakeholders' requirements.