Dependence on financial reporting is ever important for startups and small businesses for setting benchmarks. Besides, there is a huge requirement for knowing operational decisions, and measuring overall organizational health. Though most business owners of flourishing and upcoming business stay relevant to the financial report available to them, it is a daunting task to acquire such. But when a small business utilizes the finely curated financial accounting software, sometimes it leads to confusion, resulting in decision paralysis.
Some of the questions that a financial report answers include the most important small businesses’ financial reports, frequency of report compilation, data chunk for running, consequences of not presenting right forms, and kinds of reports.
Here is a list of 7 Must-Read Financial Reports for Small Businesses –
1. Balance Sheet –
The balance sheet, also known as – ‘Statement of Financial Situation’, is the foremost important financial report for a small business, which provides a snapshot of a company’s overall finances. A balance contains liabilities and owner equity for equaling all assets.
Liabilities include accounts payable and taxes, which are short-term liabilities. Long-term liabilities include debt and personal loans. And capital and retained earnings are included in an owners’ equity. Assets in general are the resultant of Liabilities and Owner’s Equity.
An equation comprises both present assets (liquidity) and fixed assets (moveable and immovable assets).
A balance sheet is considered an essential report for an organization and infinitely important for small businesses for closely tracking liabilities and assets.
However being lacking in data analysis, a balance sheet provides an overview of a business’s overall financial statement for a specific time, preferably at the end of a month or a quarter.
2. Statement of Income –
Termed as Profit & Loss Statement, an income statement is pivotal for a small business. Income Statement gives a business’s profitability for a specific timeline – a quarter or year for assessing whether profit gained or loss incurred.
The main aim of P&L is the calculation of sales and expenses for reaching the Net Profit amount. It is calculated by the difference in Gross Profit and Total Operating Expenses.
Gross Profit is sales after the cost of goods sold and it includes raw materials, payroll taxes, and other costs like equipment repairs and utilities. The difference in Sales and Cost of Goods Sold results in Gross Profit.
3. Cash Flow Statement –
Equal to Profit and Loss statement, a cash flow statement is a company’s profitability, though it mainly deals with cash flow for a given timeline for understanding the daily operational effect having on a business’s summation of cash flow position. A cash flow statement is prepared each month to find the inventory purchased and expenses paid every month. It is termed as Ending Cash Balance which is a resultant of (Beginning Cash Balance and (Difference between cash inflows and cash outflows)).
Cash Flow Statement includes three types of cash flows – operational cash flow, investment opportunities, and bank loans/venture capital.
4. Accounts Receivable Aging Report –
Bad management of Accounts Receivable can lead to the cause of cash flow issues at small businesses. This is the reason why companies urgently identify delinquent accounts and slow-paying customers. Any refusal to ongoing service or additional shipment requests of these customers projects where a business is taken advantage of for maintaining financial interests.
Delineating Accounts Receivable according to timeline divided in months is what most successful businesses perform for automatic Accounts Receivable in an existing accounting system. Preparing this Accounts Receivable report running once a week helps companies take a proactive approach in managing the collections process.
5. Accounts Payable Days Report –
Accounts Payable Days is calculated by the number of days taken by a company for paying vendors/suppliers. The ratio between the Accounts Receivable Aging Report and Accounts Payable Days Report results directing to cash availability.
The ratio varies major for the industries, and therefore it is important for businesses in comparing the metric of these historical figures internally and companies of similar verticals.
Timely management of this report provides companies data of ratios on timely changes for adjustment of business operations.
With bad Accounts Receivable Days report to Accounts Payable Days report ratio, businesses can select for changing payment terms for customers and/or for rescuing more flexible payment options or shift invoice timing.
6. Net Profit Margin Per Unit Time –
Calculated as the number of cents in profit generated from every rupee for sales, Net Profit Margin Per Unit Time is almost comparable to Accounts Receivable Days to Accounts Payable Days ratio, where there are considerable sinusoidal waves in net profit margin among industries, though it varies seasonally, for which businesses must find trends over time. Quarterly basis analysis of net profit margin helps in price management, expenses incurred, and functional sales.
7. Budget against Actual Report –
The comparison of actual spending over budget and revenue against sales actuates small businesses in the determination of improvement for a future budget.
Businesses get an opportunity to understand spending culture by reducing expenditures or increasing future budgeting in hotspots of the areas.
Getting an idea for budget short helps in identifying locations for growth. A budget against actual report compilation gives budgeting aid in the process. Overspend should get importance for the reduction of budget expenditures and addition to unspent funds for revenue-generating activities.
These are the fundamentals for financial reports for a small business, which can help in driving business revenue, save profits, and increase budget spends toward budding opportunities.