Small business owners have a lot on their plates. Whether you run a dentist’s office, a mobile car detailing operation, or an international shipping business, financial health must remain a priority. The key to understanding what’s happening with your business and taking the right steps to optimize performance is an efficient financial reporting process.
What types of financial statements are the most important?
Any statement that gives you insight into your business is important. Common financial reports used by managers and entrepreneurs to improve performance include cash flow statements, profit and loss reports, and balance sheets.
Statement of cash flows
The statement of cash flows shows the movement of money into and out of the organization during a predetermined period of time. Cash flow statements give owners insight into the timing of any necessary capital contributions. Cash flow statements are most useful in creating cash forecasting schedules, financial planning, like annual budgets, and analyzing how much cash the current revenues are actually bringing in.
Income statement
The income statement, also known as a profit and loss (P&L) report, is a very important tool for business owners to evaluate how much money is left after all expenses are covered. The main categories on an income statement include:
- Revenues – Revenues, or income, is any money coming into your business from provided sales or services.
- Expenses – Expenses include any costs associated with running your business. This section accounts for salaries, office supplies, inventory, borrowing costs, and more.
- Net income – Shows how much profit the business is generating over a certain period of time.
Balance sheet
The balance sheet focuses on how much the company owns and what they owe. The primary sections on a balance sheet are assets and liabilities, which show how much equity ownership has in the business.
- Assets – Assets include cash, cash equivalents, and fixed assets (land, building, furniture, equipment, vehicles, etc.). The accounts receivable balance, or the total of what money is owed to your business, is also considered an asset.
- Liabilities – Liabilities are the business’s financial obligations. Loans, mortgages, accounts payable balances, and any intercompany loans appear in this section.
- Equity – Equity is what is left when you deduct liabilities from assets. This statement tells the end user exactly what the company is worth today.
Financial reporting FAQs
I work alone and run my business as a sole proprietorship. Do I still need financial reports?
If you operate your business as a sole proprietorship and don’t have any employees, you still need to have a financial reporting process in place. Reviewing each month’s revenues and expenses and noting any material differences from prior periods or from your budget will allow you to make more informed decisions about hiring, purchasing, marketing, and more. If you are a one-person shop, consider outsourcing bookkeeping or working with a small business accounting firm, like Edge Capital.
How often should we be reviewing our financials?
It’s best practice to review, at minimum, your income statement and balance sheet at the close of each month. This gives the business owner an opportunity to review any changes in assets. Understanding which aspects of the business are contributing the most to your profit margin, or loss, will help you increase revenues and reduce unnecessary expenses in future months. If you work with a remote bookkeeper or another third-party financial expert, it is reasonable to expect copies of the financial reports within two weeks of the period close.
Can’t the CPA that does my taxes just complete my reporting?
Yes, your tax preparer can prepare your financial statements monthly or annually. However, the average hourly rate for certified public accountants (CPA) is $150. If you leave the responsibility of creating income statements, balance sheets, and cash flow statements in the hands of your tax professional, you will likely overpay for tax preparation. Also, the CPA cannot be expected to keep up with your daily operations, which creates several missed opportunities for growth throughout the year. If you prefer to leave financial management in the hands of experts, you are better off seeking out an outsourced bookkeeping service for your business.
Final Thoughts
Understanding financial reports is a vital part of running a profitable business. Three basic financial statements include the income statement, balance sheet, and cash flow statement. If you want to increase profits and continue growing your business, accurate financial reporting is the key. To maximize efficiency and leave you time to do what you do best, consider using small business accounting services, like The Edge Capital, to prepare and interpret your business’s financial statements.