A financial statement is an essential tool for both individuals and businesses to provide an accurate snapshot of financial health. It serves as an important document to evaluate financial performance and is required in a variety of situations. In this blog post, the experts from Mark Dicus & Company share a breakdown of when you might need a financial statement.
Applying for a Loan or Credit
One of the most common instances where a financial statement is required is when applying for a loan or credit. Lenders, including banks and other financial institutions, use these statements to assess the borrower’s ability to repay the loan. A personal financial statement for individuals or a business financial statement for companies provides a clear picture of assets, liabilities, income, and expenses. The lender will analyze these details to evaluate your creditworthiness.
Tax Filing
Financial statements are also crucial during tax season. Individuals and businesses are required to submit detailed information about their income, expenses, and other financial activities. For businesses, this includes an income statement, balance sheet, and cash flow statement. These documents are necessary to ensure compliance with tax laws and to accurately report earnings to tax authorities.
Business Acquisition or Merger
When buying, selling, or merging with a business, financial statements are required for due diligence purposes. Potential buyers will review the seller’s financial documents to understand the financial standing and risks involved in the transaction. Similarly, if your company is merging with another, financial statements help both parties assess the value of the business and determine fair terms for the deal.
Investor Relations
Investors and potential investors require financial statements to assess a company’s financial health, profitability, and future growth potential. Whether you are a publicly traded company or a private business seeking venture capital, providing clear and accurate financial statements is vital for maintaining investor trust and attracting funding.
Internal Business Management
A financial statement is not just for external stakeholders; it’s also a critical tool for internal management. Business owners and managers use these documents to track the financial performance of the company, make informed decisions, and plan for the future. Regular financial reporting helps businesses stay on track with budgeting, forecasting, and managing day-to-day operations.
Legal & Regulatory Compliance
In some cases, businesses may be required by law to submit financial statements. Regulatory bodies may require these documents to ensure transparency, protect investors, or maintain fair market practices. For example, publicly traded companies are required to submit quarterly and annual financial statements to the Securities and Exchange Commission (SEC) in the United States.
Personal Financial Planning
For individuals, financial statements are useful for personal financial planning. Whether you are planning for retirement, buying a home, or managing personal investments, tracking your income, expenses, assets, and liabilities provides a comprehensive overview of your financial situation. It helps identify areas where you can save, invest, or cut back on spending.
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In summary, financial statements are needed in various scenarios, ranging from applying for loans to managing taxes and handling business transactions. They provide a transparent look into your financial standing, helping you make informed decisions and meet legal and regulatory requirements. Whether for personal or business purposes, understanding when and why to use a financial statement can help streamline your financial processes and ensure financial success. Call Mark Dicus & Company for any of your financial statement needs.