Basic financial reports explained
Financial reporting includes thoroughly analyzing monthly, quarterly, or annual financial data to enhance company performance and results. A practical and accurate financial reporting method can help you better understand your company’s economic condition and discover opportunities for potential expansion.
Finance, business partners, and stakeholders primarily rely on the health of an organization’s finances when making strategic decisions about its operations, development, and future viability. Financial reports help in making these strategic decisions that are helpful for an organization’s sustainability.
It’s imperative to engage with professional accounting and bookkeeping services in the UAE regarding the critical role of financial reporting. These services can provide the expertise and support needed to ensure accurate and reliable financial reports.
Types of Financial Reports
Let’s discuss the four major types of final reports applicable in all financial practices.
1. Income Statements
An income statement, often known as a profit and loss (P&L) statement, assesses your present financial situation and growth potential.
The income statement summarizes the total amount of profits or expenses incurred by the companies, which displays the profitability during a specific time (quarterly, monthly or yearly)
Essential Elements in an Income Statement
- Revenue (Sales):
Revenue, often referred to as ‘top line,’ is the money received from the sale of products or services. It represents the total amount of money generated before any expenses are deducted.
- COGS, or Cost Of Goods Sold:
COGS is the expense incurred in manufacturing the products or services that the business sells. It covers the labor and supplies used directly in the production process. You can calculate the gross profit by deducting COGS from sales.
For instance:
Sales: $150,000
COGS: $90,000
Gross Profit: $60,000 (Sales – COGS)
- Operating Expenses:
These cover all operating expenses for the company that aren’t directly related to output, like rent, utilities, payroll, and marketing. The Operating Profit is obtained by deducting Operating Expenses from Gross Profit.
For instance:
Gross Profit: $60,000
Operating Expenses: $30,000
Operating Profit: $30,000 (Gross Profit – Operating Expenses)
- Non-Operating Expenses:
These expenses include interest payments, taxes, and other one-time charges that are unrelated to the main operations of the business. Net Profit is obtained by deducting non-operating expenses from Operating Profit.
For instance:
Operating Profit: $30,000
Non-Operating Expenses: $10,000
Net Profit: $20,000 (Operating Profit – Non-operating Expenses)
| Income Statement | Amount |
| Sales (Revenue) | $150,000 |
| Cost of Goods Sold (COGS) | $90,000 |
| Gross Profit | $60,000 |
| Operating Expenses | $30,000 |
| Operating Profit | $30,000 |
| Non-Operating Expenses | $10,000 |
| Net Profit | $20,000 |
Rent for workspace and marketing are examples of operating expenses. One-time purchases and interest on borrowed funds are examples of non-operating costs. Sales include the price of every item sold.
It’s common for your company to experience losses at different times, such as when introducing a new product or growing.
However, repeated expenses that exceed your income are a “red flag”. They indicate that money is constantly leaving the account faster than it is entering it. Keeping an eye on your finances allows you to identify these problems early and take appropriate action.
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2. Balance Sheets
The balance sheet, a key tool in assessing an organization’s financial health, presents a snapshot of its financial standing at any given time. It encompasses liabilities, equity, and assets.
Plant and machinery, property, cash and financial equivalents, and tangible and intangible investments are among the fundamental categories included within the assets.
Examples of liabilities include payables, tax obligations, financial obligations, etc.
There are two forms of assets and liabilities: current and long-term.
A basic formula for your balance sheet:
Business Assets = Business Liabilities + Owner Equity.
Short-term assets include cash in your company’s bank account and inventory you anticipate selling soon. They could also be long-term investments like large machinery and real estate.
On the other hand, liabilities consist of long-term debts like corporate loans and short-term debts like expenses associated with manufacturing current commodities.
Equity is the portion of money and resources provided by the owner, partner, and non-controlling interests.
3. Cash Flow Statements
Often referred to as the statement of cash flows, the cash flow statement presents the total amount of money that a business makes and spends over a given period. It is based on how a business operates, finances, and makes investments.
The cash flow statement is a powerful tool that provides valuable information regarding a company’s stability. It offers insights into how a company manages its cash flow to fund operations, settle debt, and cover present costs and prospective investments.
Lenders and investors can use this information to assess the likelihood of repayment, making the cash flow statement a key document in financial analysis.
There are three primary components to the cash flow statement of larger businesses:
- Operating activities include Sales cash receipts, payroll, income tax, inventories, accounts receivable, and payables.
- Investing activities
- Primary investment activities include issuing loans or credit, selling assets, generating and utilizing investment earnings, and making payments from mergers or acquisitions.
- Secondary investment activities include fixed asset acquisitions for machinery, real estate, or offices.
- Financing activities include stock buybacks, receivable dividends, debt repayment and issuance, and cash payments to investors and shareholders.
There is also a direct way of measuring cash flow. Cash flow involves listing all the actual cash inflows and outflows from operating activities, providing a clear view of the cash transactions that occur within a company during a specific period.
The cash flow statement is a practical and essential tool for small businesses. It simplifies cash flow into two types: cash inflows and cash outflows.
The fundamental idea behind a statement is understanding and comprehending precisely where money is coming into and going out of it. This practicality should support you in managing your business’s financial health.
A company’s net profits are considered high quality if cash-on-hand regularly exceeds net income.
Download our ready-to-use “Cashflow Template”now!
4. Accounts Receivable
Accounts receivable management describes the sums clients owe the company for products sold or services provided on credit.
The following elements are included in the accounts receivable process:
- Invoicing is a pivotal part of the accounts receivable process. It’s when the company formally requests payment from the client for the products or services provided on credit.
The invoice, a crucial document, details the items or solutions, the customer’s name, the transaction date, the total amount owed, and the payment terms.
- Payment Terms are the backbone of the accounts receivable process. These terms, agreed upon by the company and the client, set the timeline for the client to send payment.
Clear and agreed-upon terms like ‘Net 30’ (payment due within 30 days), ‘Net 60,’ or ‘Net 90’ are common payment arrangements that ensure smooth transactions.
- Accounts Receivable Aging Report: This financial report arranges outstanding client invoices by age for easy viewing and analysis.
The receivables are divided into aging buckets of 30 days, 60 days, 90 days, and more.
- Collection Actions: Businesses must take proactive measures to collect to guarantee on-time payments. This might include following up with calls, sending reminders, or starting to collect letters.
Maintaining good client connections while ensuring timely payment requires clear communication and a professional approach.
- Processing of payments: These must be appropriately logged and applied to the relevant client accounts as soon as they are received. All payments should be recorded in the accounts receivable system.
Additionally, the most recent information regarding outstanding balances should be available.
- Bad Debt Management: Customers may occasionally miss payments, which leads to bad debts.
It’s critical to have rules and processes in place to deal with these circumstances, including determining how trustworthy an individual is and, if required, taking legal action.
Maintaining good client interactions is a strategic move in accounts receivable management. Regularly monitoring your account receivable aging report and implementing good collection methods are all part of a comprehensive approach. This values client relationships and ensures financial stability and prompt collections.
Final Words
Access to precise and up-to-date financial reports is not just about numbers. It’s about gaining insights that will help you identify areas for development and problems that could consume resources.
Understanding these reports can be a game-changer, helping you prepare for meaningful discussions with potential investors and lenders.
Contact Paci.ai for more information about the simple process of generating and applying these four financial reports. Similarly, if you require business advice, our knowledgeable staff is here to guide you.
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