Financial statements give you an overview of how your business is performing and, in any case, they are necessary for you to prepare.
As we’ve discussed before, each of the 3 key financial statements play a respective role in helping your small business move forward.
The cash flow statement helps you run the short term affairs of your business. It summarizes information for you to know whether or not your business is running out of money to meet daily expenses of entrepreneurship.
A bank would be interested in knowing whether they are loaning a stable business, relatively speaking. Here is the Cash Flow Statement Format.
The income statement is used by an investor or a financier to know whether your business makes profits or not and why or why not this is the case. Check out our Income Statement Format.
Lastly, there is the balance sheet or statement of financial position which not reveals the worth of your business but can be a basis for collateral, for loan, if you have a business invested in substantial assets. Have a look at a balance sheet statement.
There is one more thing …
You cannot close your accounting for they year without including a narrative that explains everything that you have included in those 3 financial statements.
These notes that go with the financial statements are considered part and parcel of your financial information that investors, financiers or reviewers will go through.
As if preparing accounts didn’t tire you enough, you should know that the word “narrative” is used in a literal sense. You’re not supposed to leave out any information that expounds on what you have in your financial statements.
So what is included? The notes for the financial statements can be referred to as the Summary of Accounting Policies Applied in preparation of statements.
But first you must write about the nature of activities of your business, it’s legal structure and where your offices or equivalent address is.
After this, you can summarize how you have complied with financial reporting standards, whether you have used accrual or cash accounting and relevant stories like what currency are the items in. You have to remember the notes are basically an explanation of what is in your financial statements.
The third part of your notes is where the hard work is. You must write a few sentences with supporting information on what is on the statements. And these must be written in the sequence by which they appear. For example, if you have you balance sheet first then you must start by explaining the first listing on your balance sheet.
You could explain what is the basis of the value of your assets. Is the worth of your assets determined by the cost at which you bought them or at the market price? Do you have a valuation of your brand? If yes, hopefully, how did you arrive at that?
You are also expected to include additional information such as employee benefits, affiliations of your business and contingencies for uncertain turn of events.0