Financial statements: Overview, definition, and example
What are financial statements in a contract?
Financial statements in a contract refer to formal records of a company’s financial activities and position, typically required as part of agreements like loans, partnerships, or acquisitions. These statements include key documents such as balance sheets, income statements, and cash flow statements, providing transparency about the company’s financial health.
For example, a lender may require a borrower to provide audited financial statements as a condition of a loan agreement.
Why are financial statements important?
Financial statements are important because they provide an accurate snapshot of a company’s financial condition, enabling informed decision-making and risk assessment. They help ensure transparency, accountability, and compliance with contractual obligations, such as financial covenants or reporting requirements.
For SMBs, including financial statement provisions in contracts helps establish trust with partners, lenders, or investors and ensures clarity in financial obligations and performance expectations.
Understanding financial statements through an example
Imagine a loan agreement where a borrower must maintain a certain level of financial stability. The agreement might require:
- “The Borrower shall provide quarterly financial statements, including a balance sheet, income statement, and cash flow statement, certified by the Borrower’s Chief Financial Officer.”
This allows the lender to monitor the borrower’s financial health and ensure compliance with the loan terms.
An example of a financial statements clause
Here’s how a financial statements clause might appear in a contract:
“The Company agrees to deliver to the Investor: (a) audited annual financial statements within 120 days after the end of each fiscal year; (b) unaudited quarterly financial statements within 45 days after the end of each fiscal quarter; and (c) such other financial information as the Investor may reasonably request. All financial statements shall be prepared in accordance with generally accepted accounting principles (GAAP).”
Conclusion
Financial statements in contracts provide transparency and accountability by requiring parties to share accurate financial information. These provisions help monitor performance, assess risks, and maintain trust between the parties.
For SMBs, including financial statement clauses in contracts is crucial for building credibility with lenders, partners, or investors. They ensure that agreements are based on clear, verifiable financial data, fostering confidence and compliance in business relationships.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.