Accounting Management tips

Understanding financial statements in 4 steps

To know where your money goes, where it comes from and how much you have to carry out various projects, producing financial statements is essential.

Your financial statements help you to make intelligent business decisions each day, but did you know that they are also needed if you want to apply for a loan or integrate an investor in your business? That is why properly understanding them and integrating them into your accounting processes is vital.

Let's explore the financial statements universe together in 4 steps.

01 What are financial statements?

First, let's start by defining what financial statements are. Financial statements are a set of documents which attest to your company’s current financial situation. They provide you or potential investors with an overview of your income and expenses, your possessions and debts and are an excellent indicator of your company’s performance.

02 The most important documents

Financial statements are made up of three main documents:

  • The balance sheet: A document which shows your assets, liabilities and capital (what you have - what you owe = what you are worth). The production frequency of the balance sheet changes from one company to another. Some companies produce their balance sheet every month, others do it quarterly.
  • The income statement: A report which, as the name suggests, provides you with the results for a given period in order to show your profitability. It outlines your profile for the given period by subtracting your expenses from your income.
  • Cashflow: Cashflow provides you with a picture of the activity in your bank account, more specifically your company’s fund entries and disbursements. It allows you to follow each of your dollars and to quickly know if your flow is positive or negative, for how long and if it means that your business is doing well or if you risk running into financial problems in the near future.

Together, they offer a clear picture of your company's financial health.

03 The objectives of financial statements

In addition to providing you with an overview of your company's financial situation, financial statements also have more specific objectives:

  • They make it easier to make business decisions, mainly about large expenses, and help you better understand how your business is doing and what exactly is going on.
  • They allow financial institutions or potential investors to have on hand the right tools to analyze the company's situation before taking a decision.
  • They allow you to compare the financial performance of your business with that of others in your industry.

04 A few rules to follow

To facilitate the understanding and analysis of financial statements, there are accounting standards and principles that you can follow. These standards vary according to whether you are a publicly traded company (IFRS) or a private enterprise (ASPE).

It is not mandatory for private enterprises to follow the standards. They exist to ensure a certain level of compliance so that those who will be using financial statements to make decisions feel more confident and secure. Regardless of the type of enterprise, the only standards that must absolutely be followed are tax laws and government legislation.

Trust the professionals

Understanding and following these rules can be complicated and that's why some companies decide to have their financial statements prepared by a professional accountant.

Not only will a professional accountant produce your financial statements according to current accounting standards and rules, but they will also help you to analyze them correctly so that you can draw the appropriate conclusions and make the right decisions for your company afterward.

Whether or not you decide to have your financial statements prepared by a professional accountant, the management of your daily finances partially remains in your hands and having the right tools, such as the right accounting software, will greatly facilitate your operations and help you ensure the proper functioning of your business.

Are you looking for a solution to manage your accounting? Contact our team of experts to learn more about our many specialized tools!

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