Evaluate and present financial performance: Business Financial Statement

The contents of a Business Financial Statement may vary based on the type of business and the context in which the statement is needed. That said, most financial statements include information about your business income, expenses, and tax obligations.

Here are two key things you might encounter when making your own Business Financial Statement:

Balance sheet

A Balance Sheet, also known as a Statement of Financial Position, conveys the financial health of a company on a given date and the company's ability to pay its debts. It comprises three main elements: assets, liabilities, and equity.

• "Assets" are something a business has ownership of or controls, like cash, accounts receivable (money owed to the business by its debtors), inventory, and fixed assets (assets that are not quickly converted into cash, like land, buildings, and equipment). 
• "Liabilities" are things that a business owes, such as taxes, accounts payable (money owed by a business to its creditors), salaries, and notes payable (written promissory notes that a business receives when it borrows money from a lender). 
• "Equity" is what the company owes to its owners or retained earnings. 

A Balance Sheet is structured so that the company’s total assets are equal to the sum of liabilities and equity. Because the total assets of a business must be equal to the amount of capital invested by the owners and any borrowings, the total assets of a business must be equal to the sum of equity and liabilities. 

To use a simple example, imagine a business purchasing a truck that costs $10,000. It pays for the truck using a $5,000 loan (liability) and $5,000 cash (equity). This would mean that the business's assets are worth $10,000, while its debt is $5,000 and equity is $5,000. In this example, the assets match the sum of the debt and equity. If the Balance Sheet does not balance, this is a red flag that there is a problem with the entries or that the business has not accounted for one or more transactions.

Income Statement

Also known as a Profit and Loss Statement, an Income Statement is a way to show how much money a company will make (the net profit) after all of its expenses are accounted for over a specified period of time. To calculate net profit, an Income Statement uses two elements: revenue and expenses. Revenue is any money that the business has earned over a period of time. It includes any discounts or deductions for returned merchandise and is calculated by multiplying the price at which goods or services are sold by the number of units or amounts sold. Expenses are the costs incurred by the business over a period of time. Expenses can include salaries, depreciation, rental charges, etc. Net profit is then calculated by deducting the expenses from the revenue and subtracting any income tax for that fiscal period from that total.

Together, a Balance Sheet and an Income Statement—both included in this Business Financial Statement—can help identify potential problems, positive and negative trends, and areas for improvement.

The Business Financial Statement is a fundamental financial statement made up of various components that meticulously track the expenses and income of a business across different categories. Here are a few of the terms you may encounter when making your own:

Revenue and income

Revenue and income encompass the business's overall income and are broadly categorized into two sections. The primary portion records revenue generated from the core business operations, representing income earned through standard business activities. The second portion captures more miscellaneous income, such as earnings from the company's investments, including interest and dividends. This distinction helps in assessing the diversified sources of income contributing to the company's overall revenue.

Cost of goods sold (COGS) 

Cost of goods sold incorporates the direct expenses associated with the company's operations, such as labor costs, raw material expenses, and direct overheads related to the production or procurement of goods. Subtracting these costs from the revenue provides the business's gross margin, a pivotal metric for assessing profitability.

Operating expenses and profit

Operating expenses encompass indirect expenses that are essential for running a business. These costs include administrative expenses, depreciation expenses, marketing and distribution expenses, selling costs, research and development expenditures, and more. 

Similarly, operating profit, or EBIT (Earnings Before Interest and Taxes), is determined by subtracting the operating expenses from the gross margin. This figure signifies the positive balance resulting from core operations, serving as a key indicator of a business's profitability and solvency.

A positive operating profit instills confidence in stakeholders and investors regarding the company's financial stability and success.

Net income

Net income represents the net profit generated by the business after accounting for both operating and non-operating expenses, interest payments, and taxes. This is the profit available for distribution to shareholders and is crucial in assessing the overall financial performance and health of the company. Furthermore, the earnings per share (EPS) is calculated based on the net profit.

A Business Financial Statement can provide a detailed insight into a business's income, expenses, and overall profitability. However, you don’t have to worry about all the details – let us handle those for you! With Rocket Lawyer, all you have to do is answer a few questions, and we will build the document for you. Get started now!