Are you still using the same, conventional manual method of creating financial statements? Today, creating accurate and insightful financial statements is more critical than ever. Whether you’re a solo entrepreneur, startup, investor, or financial analyst, understanding this process is essential for making informed decisions. This blog aims to demystify the creation of financial statements in 2024, explore their importance, types and steps involved, leveraging advancements in AI software.
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What Are Financial Statements?
Financial statements are detailed reports that capture a business’s financial story at a specific moment. They include the balance sheet, income statement, cash flow statement, and statement of changes in equity. The balance sheet shows what the company owns and owes, while the income statement highlights revenues and expenses. The cash flow statement tracks the movement of cash in and out of the business. Together, these documents provide a clear picture of the company’s financial health.
5 Financial Statements Important for Your Business
1. Monthly P&L (Profit and Loss Statement)
A monthly Profit and Loss statement (P&L) is a financial report that summarises a business’s revenues, costs, and expenses over a month. It is significant for businesses because it helps track monthly financial performance and trends, identify areas for cost reduction and resource allocation, and understand which revenue streams are most profitable.
Additionally, it provides timely data for strategic decision-making, ensures the business operates profitably and meets financial obligations, and offers a clear financial summary for communication with stakeholders such as investors, lenders, and management.
2. Schedule 3 – Balance sheet and Income Statement
Balance Sheet
Imagine the balance sheet as a financial photograph, capturing a moment to reveal what a company possesses and owes, and the value of the owners’ stake at that precise instance.
Following are the components of balance sheet:
- Assets: Think of them as the productive tools at the company’s disposal—cash, investments, properties, equipment, and inventory—that generate income.
- Liabilities: These are the financial commitments the company must settle in the near future—loans, bills, and other obligations.
- Equity: This represents the residual interest or claim on assets after deducting liabilities. It’s like the shareholders’ share of the financial pie after all debts are settled.
Income Statement
Think of the income statement as the company’s financial performance report card, detailing how much money was earned, spent, and what remained as profit during a specific period.
Its components are:
- Revenue: It’s like the company’s earnings scoreboard, showing the total cash generated from sales and other income sources. It’s akin to the points scored in a game.
- Expenses: These are the operational costs incurred to keep the business running smoothly. They include everything from manufacturing expenses to rent payments and employee salaries.
- Net Income: Just like the final score in a game, net income is what remains after subtracting expenses from revenue. It indicates whether the company ended the period with a profit (positive net income) or a loss (negative net income). It’s essentially the bottom line of the company’s financial performance for that period.
3. Cash Flow Statement
Think of the cash flow statement as a financial GPS for a business, guiding it through the twists and turns of cash movements. Just like a GPS tracks your route and shows where you gain or lose time, the cash flow statement tracks how cash flows in and out of a company over a period.
- Cash Inflows (Revenues): This statement shows the cash brought into the company—from sales, investments, or loans. They keep the business moving forward.
- Cash Outflows (Expenses): It reflects the cash exits of the company—for expenses like wages, supplies, or investments in new equipment. They’re the costs of keeping the business on track.
- Net Cash Flow: Similar to your journey’s net result, net cash flow shows whether the company ended up with more cash (positive cash flow) or less (negative cash flow) after all the twists and turns. It’s the ultimate destination for financial health.
By following the cash flow statement like a GPS, businesses can navigate their financial path, make adjustments to stay on course, and ensure they have enough fuel (cash) to reach their goals.
4. Accounts Receivable Ageing Report
The accounts receivable ageing report is similar to a time-travelling map for a business, revealing the journey of unpaid invoices through different stages of ageing.
- Current Invoices: These are like invoices that just embarked on their journey—recent sales waiting to be paid. They represent the freshest transactions on the map.
- 30-Day Invoices: These invoices have been on the road for about a month. They’re starting to show their age but are still within a reasonable payment timeframe.
- 60-Day Invoices: Now, these invoices have been travelling for two months. They’re ageing more noticeably, indicating delayed payments that need attention.
- 90-Day Invoices and Beyond: These are like invoices that have been on a long expedition, three months or more. They represent the most aged invoices, signalling potential issues with collections or overdue payments.
The aged accounts receivable report helps businesses see where their invoices stand in terms of payment timelines.
5. Budget and Forecast Reports
- Budget Report: It outlines the expected income and expenses based on past data and future projections. Just as you plan your stops and expenses in advance for a trip, the budget sets financial goals and allocates resources to achieve them.
- Forecast Report: It adjusts the initial plan based on current conditions and unexpected events. Similarly, the forecast report uses up-to-date information to predict future financial outcomes, adjusting strategies to stay on course despite changing economic or market conditions.
Why do we Need Financial Reporting
Financial statements serve many essential roles at startups and businesses:
- Decision-Making: They assist management in making strategic decisions by providing insights into profitability, liquidity and financial stability.
- Insights to Investor: Prior to making an investment, investors evaluate a company’s development potential and financial stability using these statements.
- Regulatory Compliance: They ensure adherence to accounting standards and regulatory requirements, providing transparency to stakeholders.
- Performance Evaluation: Businesses use these statements to compare their financial performance to competitors’ and industry norms.
- Benchmarking: Businesses use financial statements to assess how they are doing in relation to industry norms and competitors.
- Planning and Forecasting: Financial statements provide the historical data required for planning future activities and forecasting future trends.
- Transparency and Accountability: Financial statements ensure transparency and hold the company’s management accountable to shareholders and other stakeholders by showing how resources are being used.
Steps to Create Financial Statements in 2024 using AI software
Creating accurate financial statements involves a systematic approach, supported by AI software:
- Data Collection:
- Prepare the Balance Sheet:
- Streamline the categorization and valuation of assets, liabilities, and equity components with AI algorithms
- Advanced AI software such as Febi.ai automate the reconciliation of balances and ensure accuracy in financial reporting.
- Compile the Income Statement:
- Construct the Cash Flow Statement:
- Prepare the Statement of Changes in Equity:
AI tools assist in tracking changes in equity, including adjustments from transactions like stock issuances or buybacks. - Review and Validation:
- Disclosure and Presentation:
Utilise AI tools to gather and organise financial data from various sources, including transactions, invoices, and payroll records.
AI-driven analytics can analyse revenue streams and categorise expenses, facilitating the calculation of net income.
View the breakdown of your cash flows into operating, investing, and financing activities, ensuring comprehensive tracking and reporting.
Use automated data validation and error-checking to ensure accuracy and compliance with accounting principles.
Use AI-generated templates and reporting tools to present financial statements in a clear and standardised format, meeting regulatory requirements.
Febi.ai – One-Click Access to Financial Statements and Reports
Creating and managing financial statements can be complex and time-consuming, but Febi.ai simplifies this process effortlessly. As India’s first AI-powered platform, Febi allows you to generate essential financial statements and over 20 detailed reports with just one click, all in under two minutes. The solution transforms financial management by streamlining both the creation and analysis of these documents.
Its AI-driven insights offer intuitive and dynamic charts and graphs, making your financial position clear even if you’re not an industry expert. By providing a clear view of current performance and predicting future trends, Febi empowers you to make informed, strategic decisions. Choose Febi.ai to simplify your financial processes and drive sustainable growth.
