The 5 Essential Financial Reports Every Small Business Owner Needs to Understand
The pulse of any business is its financials. They’re what keeps the business operating, and what will determine its overall health and longevity. So, if you’re a small business owner who isn’t reviewing financial reports monthly, how do you truly know where your business stands?
Many small business owners can be intimidated by reports. But, with a few tips for understanding them, you can use the insights to empower your business’ success. Here, we’ll dive deep into the 5 most essential financial reports that every small business owner needs to understand.
In addition to showing you, how simple it can be to receive them with seamless bookkeeping solutions. Keep reading to learn everything you need to know about financial reports for your small business.
The 5 Most Essential Financial Reports
Let’s not waste any time. Without further ado, here are the 5 most essential financial reports that every small business owner should be reviewing monthly.
Balance Sheet
A balance sheet is a financial statement that provides a complete overview of a business’ position. It includes three main parts –
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- Assets: Assets represent what the company owns, such as cash, inventory, and property.
- Liabilities: Liabilities are what the company owes, including loans and accounts payable.
- Equity: Equity represents any residual interest in the company after liabilities are subtracted from assets.
With these three main sections, you can get a snapshot of your business’ ability to allocate resources, meet payment obligations, and be able to financially analyze its standing to make decisions.
Profit & Loss Statement
A Profit & Loss (P&L) or income statement is the next crucial financial report every business owner needs to review. This report covers a business’ revenues, expenses, and overall net profit or loss for a specific period.
First, it begins with the total revenue of the business, deducting operating and non-operating expenses next, and leaves with a final net profit or loss. Overall, it helps measure profitability over time and measures operational efficiency, too.
By analyzing the income statement, stakeholders can assess how well the company generates profit from its operations, identify cost management issues, and make informed decisions regarding future business strategies.
Cash Flow Statement
The next crucial report to produce monthly, is a Cash Flow report. This statement shows a glimpse of the influx and outflow of cash from a business over a specific time period. It’s also most commonly divided into three sections –
- Operating: The operating section reflects cash generated from core business operations, such as sales and payments to suppliers.
- Investing: The investing section includes cash flows related to the acquisition and sale of long-term assets like property and equipment.
- Financing: The financing section covers cash movements related to borrowing, repaying debt, and equity transactions.
This statement is especially important for small business owners to review as it provides an understanding of your business’ ability to produce cash, to pay its debts, invest in its growth, and invest in current operations.
Accounts Receivable Aging Report
The Accounts Receivable Aging Report is the next report to get familiar with, so you’re aware of outstanding invoices and delinquent accounts. This report categorizes a business’ outstanding receivables based on the length of time they have been unpaid.
Typically, it divides receivables into time frames such as 0-30 days, 31-60 days, 61-90 days, and over 90 days. This report is essential for managing credit risk and collections, as it helps businesses identify overdue accounts, assess the effectiveness of their credit policies, and prioritize collection efforts.
By providing a clear view of which customers are late on payments, companies can take proactive measures to mitigate potential bad debts and improve cash flow.
Budget vs. Actual
Last but not least is the Budget vs Actual report. First, and foremost, if you’re not operating with a budget, it’s time to put one together annually. Then, it’s best to compare to your actual spending to see how you’re comparing to the plan you compiled.
That comes from the Budget vs Actual report. These reports are crucial for tracking performance, identifying deviations from financial plans, and understanding the reasons behind them.
By analyzing these variances, businesses can make informed decisions to adjust strategies, control costs, and improve financial planning, ultimately enhancing overall financial management and operational efficiency.
Understanding Financial Reports: The Benefits
Outside of the insights and analytics you’ll now be privy to, there are a few key benefits you’ll receive from understanding these reports. The most importantly being, you’ll now have the power to make informed decisions in critical areas to your business’s success such as –
- Pricing and profitability.
- Resource allocation and budgeting.
- Financing needs and loan applications.
- Identifying areas for improvement.
Put simply – without knowing where you sit financially, you aren’t able to pivot or shift accordingly to reach your goals.
The Final Word: Financial Reports
Now that you know everything you need to know about the 5 most essential financial reports – it’s time to start producing your own. Let’s be honest. You’re a small business owner, not a bookkeeper. So, it’s totally normal not to be an expert at keeping your business’ books. The key is finding someone who is!
When exploring bookkeeping solutions for your small business, look no further than Top 2 Bottom, AKA T2B. We started off as a small business ourselves, and we know what it takes to help yours grow. Experience the T2B difference and find out what it’s like to have a dedicated payroll or bookkeeping account manager – that actually answers your calls when you need them the most!
Schedule a complimentary consultation with our team to start customizing your own bookkeeping or payroll package today.