Three Basic Financial Statements

While there are some differences between nonprofit and for-profit entities, all businesses typically prepare these three most Common Financial Statements  — the balance sheet, the income statement, and the cash-flow statement. These documents are prepared according to generally accepted accounting principles and presented in a standardized format.

Financial statements are neutral; they present an accurate picture of the activities of the business over a defined period. The business manager then evaluates the data to make operating decisions, such as whether the business is positioned to free up existing cash for operating expenses or needs to obtain additional credit.

The Balance Sheet

The information in the BALANCE SHEET drives many business decisions. For example, assume you work for a company with R25 million in annual sales. Examining the balance sheet, you discover that there are six weeks of sales sitting in accounts receivable.

Simply by changing credit policies within the company and focusing on streamlining collections so that most receivables are resolved within 30 days, a million dollars can become available for operating capital without increasing sales or leveraging a line of credit. A good business manager can see possibilities for growth and efficiencies behind the numbers in the balance sheet.

Cash-flow Statement

The cash-flow statement is one of the most important documents for making management decisions. While the company can look profitable based on standard accounting methods, the CASH-FLOW STATEMENT tells managers whether the company has cash to pay its bills over the short-term.

Net income and earnings can be manipulated to paint a healthy financial picture, but the cash-flow statement presents the reality of the company’s ability to maintain operations.  A drop in the company’s operating cash-flow ratio should trigger a red flag, indicating business managers need to reassess pricing, inventory, overhead, debt, and other short-term decisions to improve the company’s cash position.

The Income Statement

The income statement differs from the cash-flow statement in significant ways: It includes intangibles such as depreciation, but it does not show when revenue is actually received and payables are actually paid. It shows projected profitability over a period. It is also a useful tool for comparing  a company’s performance to others of similar size in similar industries. The data in the INCOME STATEMENT helps inform decisions that control operating expenses and cost of goods sold to keep profit margins intact.


A business plan is a written document that describes your company, its objectives and strategies, your target market, and the financial forecast of your business. It is important to have a business plan because it will help you set realistic goals, in obtaining external funding, measure your results, clarify your business needs and establish reasonable financial forecasts. Preparing a business plan will also help ensure the proper functioning of your new business and give it every chance of succeeding.

Obtaining financial assistance to launch your new business will be directly related to the quality of your business plan. To be considered a viable candidate to receive funds from a financial institution or investors, you must demonstrate that you understand all aspects of your business and its ability to generate profits.

A business plan is more than a simple document to show lenders and investors. It is also necessary to help you plan the growth and progress of your business. The success of your business may depend on your plans for the future.

Here are examples of questions you can ask yourself when writing your business plan:


  • How will I make a profit?
  • How will I continue to run my business in times of sluggish sales and falling profits?
  • Who are my competitors and how will we coexist?
  • What is my target market?




About Eureka Accounting

Accounting and Taxation Company established in 2010.

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