Financial statements are a mirror of a small business's finances — they show where your company has been, where it is now, and where it could be heading. In Finland, every company, whether it's a sole proprietorship (toiminimi), a limited liability company (Oy), or a cooperative, must prepare financial statements at the end of the financial year. However, financial statements are often seen as nothing more than mandatory paperwork that is sent to the Finnish Tax Administration (Vero) and then forgotten. This is a big mistake. Financial statements are much more: they are a valuable tool that helps you make better decisions, apply for financing, and plan your company's future.
In this guide, we take a deep dive into the world of financial statements. I'll explain what financial statements are, what they consist of, and how to read them. I'll use concrete examples, such as a café or an online store, so you can see how the theory works in practice. You'll learn which key figures matter and how to interpret them. I'll also explain how financial statements differ between business forms and how you can use them to manage your company. My goal is that after reading this guide, you'll think: "Now I understand my financial statements and can use them to benefit my company!"
What are financial statements and why do they matter?
Financial statements are an overview of your company's financial position, prepared at the end of the financial year — usually once a year. They consist of several parts that show how your company has performed financially and what its financial situation is right now. In Finland, financial statements are a statutory obligation for all companies, but their value isn't limited to legal compliance. They are like a compass that guides you as an entrepreneur.
So why do financial statements matter? Here are a few reasons:
- Understanding your company's finances: Financial statements reveal whether your company is profitable and whether you can pay your bills on time.
- Decision support: They help you decide, for example, whether it makes sense to invest in new equipment or hire more staff.
- Applying for financing: Banks and investors require financial statements to see whether your company is a reliable partner.
- Tax planning: Financial statements form the basis of your tax return and help you optimize your taxes.
Example: Imagine a café owner in Tampere whose financial statements showed that the café was making a profit but still had little cash on hand. This prompted the owner to review the payment terms agreed with suppliers, and the owner negotiated longer payment periods, which improved the company's liquidity.
The parts of financial statements: Income statement, balance sheet, and cash flow statement
Financial statements consist of three main parts: the income statement, the balance sheet, and the cash flow statement. Each part offers a different perspective on your company's finances. Let's go through them one at a time.
Income statement: Where does the money come from and where does it go?
The income statement is like your company's income and expense budget for the financial year. It answers the question: "Did I make a profit or a loss?"
- Income: All the money your company has earned, for example the amounts received from a café's coffee sales or an online store's product sales.
- Expenses: Costs such as raw materials, rent, salaries, and marketing.
- Profit or loss: The difference between income and expenses. If income is greater than expenses, you made a profit. If expenses exceed income, the result is a loss.
Example: A Helsinki-based online store sold €100,000 worth of products during the year. Its expenses (e.g., inventory, marketing, and salaries) were €80,000. The income statement shows that the profit was €20,000.
Balance sheet: What do you own and what do you owe?
The balance sheet is like a snapshot of your company's financial position on the last day of the financial year. It answers the question: "What does my company own and what does it owe?"
- Assets: Everything your company owns, such as cash, inventory, equipment, and receivables (e.g., invoices that customers haven't paid yet).
- Liabilities: Everything your company owes, such as loans, trade payables, and tax liabilities.
- Equity: Your company's "net worth," i.e., assets minus liabilities. This is the part of the company that belongs to you as the entrepreneur.
Example: The café's balance sheet shows €10,000 in cash, €5,000 worth of coffee beans in inventory, and €20,000 in equipment (e.g., coffee machines). It owes €15,000 on a bank loan, so its equity is €20,000 (€35,000 in assets — €15,000 in liabilities).
Cash flow statement: How does money move?
The cash flow statement shows how money has moved during the financial year. It is divided into three parts:
- Cash flow from operating activities: Money coming in and going out from day-to-day operations, such as sales and purchases.
- Cash flow from investing activities: Money spent, for example, on buying machinery or received from selling assets.
- Cash flow from financing activities: Money related to loans, loan repayments, or dividends.
Example: The online store received €50,000 from sales and spent €30,000 on purchases and €10,000 on new warehouse shelving. It also paid off €5,000 of a loan. The cash flow statement shows how these cash flows affected the company's cash position.
Reading financial statements: Key ratios for small business owners
Financial statements aren't just a list of numbers — they are a gauge of your company's health. Key ratios let you quickly assess what shape your company is in. Here are the three most important ratios for small business owners:
Profitability: Are you making a profit?
- What does it tell you? How much profit you make relative to revenue.
- How is it calculated? Net profit / revenue × 100 = profit margin.
- Example: If the café's revenue is €100,000 and its profit is €10,000, its profit margin is 10%. A good profit margin depends on the industry, but 5–15% is a decent result for many small businesses.
Liquidity: Can you pay your bills?
- What does it tell you? Whether you have enough readily available cash to pay your short-term liabilities.
- How is it calculated? Quick ratio = (cash + receivables) / short-term liabilities.
- Example: The café has €5,000 in cash and €10,000 in receivables (unpaid customer invoices). Its short-term liabilities are €10,000. The quick ratio is 1.5 (€15,000 / €10,000), which is good — a ratio above 1 means the company can cover its debts.
Solvency: Is your company financially stable?
- What does it tell you? How much equity your company has relative to its total assets.
- How is it calculated? Equity ratio = equity / balance sheet total × 100.
- Example: The online store's equity is €20,000 and its balance sheet total is €50,000. Its equity ratio is 40%, which is reasonable — above 30% is generally considered good.
Financial statements in different business forms: Sole proprietorship vs. limited liability company
The content of and requirements for financial statements vary by business form. Here are the key differences:
- Sole proprietorship: The financial statements are often simpler. For small sole proprietorships, an income statement and a balance sheet are usually sufficient, and no cash flow statement is required. In addition, the financial statements don't need to be made public.
- Limited liability company: The financial statements are more extensive and include an income statement, a balance sheet, a cash flow statement, and notes. A limited liability company's financial statements are also public, meaning anyone can view them.
Tip: Even if you run a sole proprietorship, it pays to prepare your financial statements carefully. They help you track your company's development and make better decisions.
How can you use financial statements in decision-making?
Financial statements aren't just statistics — they are a tool that helps you manage your company. Here are three concrete ways to use them:
Budgeting and forecasting
- How? Compare the figures in your financial statements with your budget. If, for example, sales fell short of expectations, you can investigate the reasons (e.g., seasonal fluctuation) and adjust next year's forecasts.
- Example: A café owner noticed that marketing costs were high relative to sales. The owner decided to reallocate the budget to advertising during peak seasons.
Applying for financing
- How? Banks and financiers look at your financial statements to assess your company's profitability and solvency. Good financial statements improve your chances of getting a loan or investment.
- Example: An online retailer applied for a loan for a new warehouse. The financial statements showed strong profitability, and the retailer got the loan at a favorable interest rate.
Tax planning
- How? Financial statements help you and your accountant optimize taxation, for example by making use of depreciation (e.g., the decline in value of equipment) or deductions.
- Example: A construction business owner realized that the company's tools could be depreciated, which reduced taxable income and saved money. Construction business owners also have many other industry-specific ways to optimize their finances.
Financial statements are a tool, not just an obligation
Financial statements are much more than statutory paperwork — they are the key to your company's success. When you understand the income statement, the balance sheet, and the cash flow statement and keep track of key ratios, you can make smarter decisions, plan for the future, and ensure your company's financial stability.
Don't let your financial statements be just another document to file away — make them part of your company's strategic planning. If you want to make your financial management easier, check out Tilit AI — it keeps your bookkeeping up to date and gives you a real-time view of your finances. Also keep your financial management calendar in mind and make financial statement work part of your annual planning cycle. AI-assisted financial management can also help you understand your financial statements better than ever. Click here and start your free trial today!
This guide is designed to give you a comprehensive understanding of financial statements and concrete tools for putting them to use. I hope you find it useful and take control of your financial statements to your company's advantage!