Read about the Best ways to create Financial statements

Do you know that the Financial statement defines the financial health of every business? Financial health is essential to all the investors involved in the Organization. It provides the complete details of its operations, expenses, debt load, cash flow, profitability, and most importantly, the ability to meet the short and long-term financial goals of a Business.

What is a Financial Statement ?

A financial statement is a report that conveys the recent results. It intends to report the financial state of a business accurately to the investors, analysts, prospective investors, and any other interested participators. It is an essential aspect of a business plan that will help the business attract investors or obtain bank loans.

Follow these steps to create a great financial report:

1) Create A Sales Forecast

The first thing in creating a financial statement is creating a spreadsheet projecting the sales over three years; For this, use a specific section for each sales line and manage the columns for each month of the first year. Arrange columns every quarter for the years two and three.

Make three different blocks:

• One for pricing,
• One for unit sales, and
• The third one for multiplying units by unit cost to calculate the cost of sales.

Cost of sales is essential as it helps calculate a precise gross margin.

2) Build A Budget for Expenses                 

It is necessary to understand the cost needed to make the forecasted sales. Consider the fixed costs as rent and payroll and variable costs as advertising and promotional expenses while creating a budget. While creating the finance report, along with these mentioned factors, also estimate things like interest and taxes. Multiply estimated profits by assessed tax percentage rate to calculate the taxes, and then multiply the balance of the estimated debt by an estimated interest rate to calculate interest.

3) Create a Cash Flow Statement

Another step of creating a financial statement is producing a cash flow report. The step reveals physical money moving in and out of a company, Companies base their money flow statement partially on the sales forecasts, balance sheet items, and other beliefs. Existing companies should have documented financial records to project the cash flow.

4) Estimate the Net Profit

To calculate the net profit, use the digits information from the expense estimations, sales forecast, and money flow report. To do the calculation, subtract expenses, taxes, and interests from the gross margin.

This step is essential in creating a financial statement as it acts as a profit and loss report that will help develop a detailed business forecast for the next three years.

5) Handle Assets and Liabilities

It is essential to manage assets and liabilities not revealed in the profits and loss statement to estimate the net worth of a business at the end of a fiscal year. Gather and estimate how much money you expect to have on hand per month. Incorporate accounts receivable, land, equipment, and inventory. Once done, calculate debts & liabilities from outstanding loans and payable accounts.

6) Find the Breakeven Point

The breakeven point is when the business expense is in line with the sales volume. A business’s three-year income projection must allow them to obtain this estimation. The total revenue should surpass the total expenditure in a viable business. It is essential for potential investors who want to ensure they are sponsoring a company that is developing quickly and has a steady growth with an exit strategy.

What are the types of financial statements?

There are three types of financial statements, and sometimes there is a fourth one called the statement of retained earnings. Included when preparing reports for lenders and investors. These financial statements issued by companies comply with GAAP (generally accepted accounting principles)

1) Balance Sheet

A balance sheet is a type of financial statement that is a document containing liabilities, assets, and equity of shareholders for a specific period.

Developing a balance sheet is an easy task. First, list all the assets on the left side of the sheet. It could be the savings in the account, the value of equipment owned, or the value of an owned stock inventory. On the right side of the sheet, note down all the liabilities such as accounts payable, bank loans, credit card balances, and any other funds the company owes. Finally, total the assets and liabilities and subtract the liabilities from the investments. The remaining amount is known as owner equity.

2) Income Sheet

An income sheet contains the earnings or loss for a period, expenses, and revenue. To create this financial statement, collect all the kinds of income during the period the report will cover. The income sources can be anything; it could be revenue from renting out a property or from retail sales and wholesale. Now add up all the expenses such as money spent on payroll, utilities, materials, advertisements, and the rent on the business properties. To find the sum subtract the total costs from the total income.

3) Statement of Cash Flow

Statement of cash flow demonstrates the inside & outside sources of the cash flow. And the pending balance during a period. Statement of cash flows has three divisions

• Operating activities
• Investing activities and
• Financing activities.

4) Statement of retained earnings

A statement of retained earnings is a fourth type of financial statement. It starts with the balance of the previous period and adds in any net income & any dividends paid out to shareholders to arrive at the ending.

A statement of retained earnings is not always part of the created standard financial statement packet usually delivered outside entities such as investors & financial institutions.

Here is how to calculate the statement of retained earnings

Starting retained earnings + Net income – Dividends = Concluding retained earnings.

Key takeaway

Financial statements provide vital information about the business. It is essential for both business owners and investors. Financial records give information about the business’s health when packed together in financial statement form.

It is essential for business owners to make an informed decision about the business and provide financial data to investors to invest in the company.

Also Read Key considerations for Month-end / year-end financial reporting