What Are Financial Statements?
Financial statements are formalized records of a business’s financial activities, position, and performance. Information is presented in an easy-to-understand, standardized format. Financial statements can be prepared (audited or reviewed) by a Certified Public Accountant (CPA), prepared by a non-CPA accountant (un-audited), or prepared by management. Public companies disclose their financial statements (on the Investor Relations section of their website and with the Securities and Exchange Commission). Private companies and sole proprietorships also need to maintain their books in order to file taxes with the Internal Revenue Service (IRS) or prove their financial stability.
There are three major types of financial statements, according to the Securities and Exchange Commission:
Balance sheet – The balance sheet provides a snapshot of the company’s total assets, liabilities, and shareholders’ equity. This is most commonly expressed as assets = liabilities + equity. Balance sheets display the current value of assets at that moment in time, showing their depreciated value. Assets can include physical as well as intangible property, such as real estate, inventory, or accounts receivable. Liabilities encompass all money owed by a company, including outstanding loans, accounts payable, and other forms of debt. Shareholders’ equity represents the company’s net worth if the company sold all its assets and paid off all liabilities.
Income statement – The income statement shows a company’s revenues against its expenses during a specified period. Individual sources of income and expenses are listed. Then total expenses are subtracted from total revenue to determine a company’s net income. The net income represents the profit a company made during the period in question.
Cash flow statement – The cash flow statement gives an overview of how a company generates cash to pay its debts, fund its operations, and make investments. It allows you to understand where a company’s cash is coming from and how it is being spent. This statement does not use a specific formula but simply lists a company’s cash-generating activities during a specified period, how much cash it had at the start of the period, and how much cash it ended up with at the end of the period.
Using Financial Statements
Financial statements can be used by banks and other lenders to evaluate a company’s financial health and available capital when assessing its eligibility for a loan. They are often also useful or can be required when:
- Acquiring funding from investors or preparing for an acquisition.
- Qualifying for financial services, such as loans, leases, and credit cards from banks, credit unions, and alternative lenders.
- Qualifying for trade lines of credit with vendors and suppliers. Many times, such lenders are taking on more risk than a financial institution would, so they often need to gather as much information as possible before making a credit decision.
- Obtaining surety bonds to bid on or fulfill a contract, such as for construction or freight brokerage.
- Building your business credit scores. If your financial statements demonstrate your company’s financial strength, submitting them to credit reporting agencies may enhance your scores and ratings.
- You are being audited. If, for any reason, your business is audited by the IRS, they will likely request records that verify assets, purchases, and expenses. It’s important to keep a thorough and precise record of your business’s financials and retain them for the life of your business and afterward.
Preparation of Financial Statements
For all the reasons mentioned above, preparing and maintaining financial records and statements should be done by a professional accountant. It is important for multiple parties to be able to locate and understand records of a company’s financials throughout its lifetime and even beyond.
Only a CPA is qualified to audit financial statements. Public companies are required by law to have their financial statements audited by a CPA before public release. CPAs can also prepare tax returns and represent your company in case of a tax audit, while an accountant cannot. Although private companies are not required to use a CPA, it is still recommended to have an accountant prepare your financial statements.
While bookkeepers have knowledge of your business expenses, accounts payable and receivable, and financial documents like bank statements, they often don’t have the same training as an accountant. Some companies have an accountant double-check the work of their bookkeeper for accuracy. Accountants have at least a bachelor’s degree and can perform higher-level services, such as preparing detailed financial statements, performing audits, and preparing reports for tax purposes.
If your business is new, small, or private, it is acceptable under some circumstances for your financial statements to be prepared by management. However, this is generally not recommended as a permanent solution to quarterly and annual financial statement preparation, especially as your company grows and your financial statements become more complex. The preparation of these statements will also reflect on the character and transparency of the management of the company – and vice versa.
Sharing Your Financial Statements With Dun & Bradstreet
If you have a business credit file with Dun & Bradstreet, you have the option to share your financial statements by emailing them to email@example.com. When your financial statements are submitted, they are validated internally by Dun & Bradstreet before they are displayed in your business credit report.
The figures in your financial statements can affect most of your business credit scores and ratings (but not your PAYDEX® Score). These figures can include net worth, current ratio, availability and age of financial statement data, net profit after taxes, and others.
When you add your financial statements to your business credit file, it is visible when other companies access your business credit report.
On the positive side, submitting your financial statements can greatly increase the accuracy of your business credit scores and ratings. If your financial statements reflect your business as a financially strong and stable company, just uploading it to your profile can positively impact your scores. This transparency also helps build trust with the companies who access your business credit file.
However, some companies prefer to keep this information private. If you choose not to add your financial statements to your Dun & Bradstreet business credit file, your business credit scores and ratings will not be negatively impacted. However, some scores and ratings, such as the D&B Viability Rating, reflect the availability of financial information, so not all scores may be able to be calculated if you choose not to upload a financial statement.
Learn more about how to build your business credit.
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