Statement of Changes in Financial Position
The SCFP is similar to the balance sheet but differs by showing how the money came into your organization versus just an accounting of what resources are present. It also adds information about stock and work in progress, as well as any other changes within a financial period.
How Does It Differ From the Balance Sheet, Income Statement, and Cash Flow Statement
The SCFP was created to show the reasons behind the financial position of an organization or company at a specific point in time.
It is similar to the balance sheet but shows more detail on the production side of the business. A balance sheet looks at an organization’s financial standing at a single moment in time.
An income statement measures the profitability of a company or organization, showing the net income before taxes are removed. This report is useful in figuring out whether an entity made enough money within a given time frame to meet all its obligations. An SCFP includes this information but also shows how profits were generated.
A cash flow statement, on the other hand, measures how much money is coming in versus the amount of money going out. The SCFP does this but also includes information about what assets and liabilities changed during that specific time period.
When Are SCFPs Created
The SCFP is created at any point in time where there are financial changes or transactions during a specific period, such as annually, monthly, weekly, etc.
It is used to determine the profitability of an organization because it shows not only whether there was enough money to meet all the organization’s obligations but also what resources were present at that time.
The Use of SCFP Statements
Financial managers, accountants, and other individuals within a business use the SCFP to determine how well an organization is running. It also helps them figure out which revenue strategies are most beneficial so they can focus more resources there.
Managers use this information to measure the performance of their employees and the company as a whole.
The SCFP is also used by potential shareholders, creditors, and financial analysts to determine whether a business has enough assets and if it is financially stable.
The Importance of Understanding the SCFP Statements
Since so much information can be extracted from an SCFP, it is important to understand the how and why of each line item.
Financial managers must understand the principle of matching, which states that expenditures should be made on resources with similar characteristics. For example, using cash to purchase another asset is not advisable because the future benefits do not match up with the current costs.
The principle of conservation also applies here: What you see in an SCFP is what you get.
An SCFP also presents the opportunity for organizations to tell their own story about how they are performing financially. While many financial reports are based on numbers alone, the SCFP provides a narrative of where the money came from and what changes were made within an organization during that time frame.
SCFP Statements Tips for Using This Information to Improve Your Finances and Investments
Understanding the statement of changes in financial position can help you improve your finances and investments.
The principle of conservation states that what you see is what you get, meaning the outlays of an organization match up with its revenue to determine how well it is doing financially.
You can use this information to improve your company’s finances and investments by focusing on revenue sources that produce more than just a temporary influx of cash.
Common Error Made on an SCFP That Can Lead To Serious Problems With Your Company’s Finances
One common error made on an SCFP is the overstatement of income.
Under-reporting expenses seem to be a common problem, but it is also possible for organizations to inflate their revenue. This can lead to bankruptcy or serious financial problems within an organization that managers need to avoid by properly assessing the information they report.
Steps to Avoid This Problem When Creating an SCFP for Your Own Company or Organization
To avoid this problem when creating an SCFP for your own company or organization, ensure that the information you are including is accurate and unbiased. You also need to consider what other people will do with this information once they have it.
What you report may affect stakeholders, investors, or the public. For example, if you overstate revenue on your SCFP statement of changes in financial position, people will think your company is more successful than it actually is and shareholders could be at risk of losing money.
Furthermore, this inaccurate information can tarnish the reputation of your organization.
The Bottom Line
SCFPs are financial statements that present changes in both the financial position and performance of an organization.
SCFPs are used by accountants, managers, researchers, financial analysts, shareholders, creditors, and many others to determine how well a business is doing financially.
They use an SCFP to assess their company’s financial performance, while potential shareholders, creditors, or analysts can also use it to determine whether a business is financially stable.
If you want to avoid common mistakes when creating your own statement of changes in financial position, make sure you are not overstating revenue and are reporting only accurate information.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.