Whilst an important indicator, just looking at your business profit and cash at bank doesn’t give a true reflection of your performance. When it comes to the world of business, navigating the path to success requires taking a holistic view and understanding your business’s financial statements.
Financial statements show how your business is doing financially at a particular point in time. Usually compiled around 30 June in Australia, they provide an overview of your business’s overall financial health - indicating where your money is going, and where it's coming from.
Understanding these documents is essential for making strategic business decisions – for future planning, securing loans, attracting investments or possible valuation for sale.
The 3 components of financial statements are as follows:
A balance sheet is a comprehensive summary that reflects the value of an entity, including its assets, liabilities, and equity. It summarises what the entity owns and owes, as well as the investment made by owners at a specific point in time. It is divided into 3 main parts:
The balance sheet follows the equation Assets = Liabilities + Equity. This means the resources of the entity (assets) are financed by either what the entity owes (liabilities) or the owners’ personal investment in the entity (equity). By analysing a balance sheet, your investors can assess the business’s financial stability, liquidity, and solvency, which can help them make informed investment decisions.
The profit and loss statement is a financial report that defines the business’s profitability over a specific period of time (normally 1 July to 30 June in Australia if annual). It provides a detailed breakdown of the business’s revenues, costs, and expenses, and ultimately calculates the final net profit or net loss for the period. It typically includes the following:
By analysing a profit and loss statement, investors can assess an entity’s profitability, operational efficiency, and compare its performance with that of other entities within the same industry.
It’s also a helpful budgeting tool, enabling you to compare current year figures with prior year performance, which allows for informed investment decisions.
This statement provides information about a business’s cash receipts and cash payments during an accounting period (normally 1 July to 30 June in Australia if annual). It outlines how changes in both balance sheet and income accounts affect cash and cash equivalents. A cash flow statement tells us "here is the opening cash balance", "here is the closing cash balance", and where funds were spent during this period.
Financial statements are more than figures on a page, they are narratives telling stories of past performance and predictors of future success.
Understanding your financial statements is essential to running a successful business and making informed strategic and investment decisions.
By analysing these statements, you can assess an entity’s profitability, liquidity, solvency, and investment. However, it is important to note that financial statements should be analysed in the context of the business’ industry, size, and market conditions for a comprehensive understanding.
Connect with a Nexia Edwards Marshall Advisor for help understanding your financial statements. Our team of experts can provide the right insights and advice to ensure you are unlocking your business’s true potential.
The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.