Financials: Overview, definition, and example
What are financials?
Financials refer to the financial statements and reports that provide an overview of an individual’s, company’s, or organization’s financial health and performance. These reports typically include key documents such as the balance sheet, income statement (profit and loss statement), cash flow statement, and statement of equity. Financials offer critical information about an entity’s revenue, expenses, profits, assets, liabilities, and cash flows, helping stakeholders like investors, creditors, and management make informed decisions about the entity’s performance, risk, and future prospects.
Why are financials important?
Financials are important because they provide transparency and insight into a company’s financial position and performance. For investors, creditors, and other stakeholders, reviewing financial statements is essential for evaluating a business’s profitability, liquidity, and financial stability. Financials also help businesses manage their own operations by tracking cash flow, controlling costs, and identifying areas for improvement. Additionally, regulatory bodies require certain financial reports to ensure that businesses comply with legal standards and tax obligations.
Understanding financials through an example
For example, a company preparing for an investment round will present its financials to potential investors. These financials might include:
- Balance Sheet – Showing the company’s assets, liabilities, and equity at a specific point in time.
- Income Statement – Detailing the company’s revenues, costs, and expenses over a period, showing profitability.
- Cash Flow Statement – Showing the inflow and outflow of cash, highlighting the company’s ability to generate and manage cash.
- Statement of Changes in Equity – Showing how the company’s equity has changed over time, including stock issuances, dividends, and retained earnings.
These financials will help investors assess the company’s financial health and decide whether or not to invest.
In another example, a small business owner might review their own financials to determine how much profit they have earned, how much debt they owe, and whether they have enough cash flow to pay bills. For example, if the income statement shows that the business is consistently profitable but the cash flow statement shows a cash shortage due to delayed customer payments, the owner may decide to tighten credit terms or pursue new financing options to address the cash flow issue.
An example of a financials clause
Here’s how a financials clause might appear in an investment or loan agreement:
“The Borrower shall provide the Lender with unaudited financial statements on a quarterly basis, including a balance sheet, income statement, and cash flow statement. Audited financial statements shall be provided annually within 90 days of the end of the fiscal year. The Lender may request additional financial reports if necessary to assess the Borrower’s financial position.”
Conclusion
Financials are a vital part of understanding a business’s financial health and performance. They provide a clear picture of the company’s financial position and help stakeholders make informed decisions. By reviewing and analyzing financials, businesses can improve their operations, secure financing, attract investment, and ensure regulatory compliance. For both internal management and external stakeholders, financials are a key tool for measuring success and identifying areas for improvement.
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.