Core Financial Statements

Every business regardless of scale ranging from a sole trader to a well established business relies on the following three core financial statements. Each of them is different in nature, but equally vital, part of a business’s financial story. 

• The Profit and Loss Statement: The profit and loss statement summarises your revenues, costs, and expenses over a specific period, ultimately showing whether your business made a profit or a loss usually a month, quarter, or year. Other than telling you the profitability it also proves effective in cost management by keeping expenses under control and letting you know timely if they are growing faster than your revenue. Additionally it is important for developing an effective pricing strategy. Particularly in the UK your profit and loss statement is crucial for calculating your corporation tax liability for limited companies or your taxable profit for self assessment for sole traders. It also helps you identify trends in your sales and expenses, allowing you to make strategic adjustments on time and save costly mistakes. The key components of a profit and loss statement are revenue, cost of goods sold, gross profit, operating expenses and net profit. 

• The Balance Sheet: The balance sheet is an overview of the financial standing of your business at a certain moment in time, including its owner’s equity, liabilities and assets. It tells you the financial health, asset utilization and debt levels clearly. Your balance sheet is critical for assessing your business’s financial stability. Lenders will scrutinise it heavily before offering loans. It’s also a key document filed annually with Companies House for limited companies, providing a public record of your financial position. The key components of a balance sheet are current assets and fixed assets, current liabilities and long term liabilities along with equity of the business owner.

• The Cash Flow Statement: This is the most important statement for daily operations to continue. The cash flow statement tracks the actual movement of cash in and out of your business. It is considered as a summary of the actual cash inflows and outflows over a specific period, categorised into three main activities that reconciles the difference between profit and actual cash. It provides you with an honest picture of liquidity, cash generation and financial health. This statement serves as your standard survival strategy. It’s essential for predicting your future financial situation and preventing a cash constraint. The key components of the cash flow statement are cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.