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Finance Forward Blog

The Essential Financial Reports Every Small Business Needs

The Essential Financial Reports Every Small Business Needs

As a small business or startup, it may be overwhelming to review all of the financial reporting that is available to you. Here are a few essential reports that you should be looking at on a monthly, if not weekly, basis to create a clearer image of the financial state of your business.

The Balance Sheet

The Balance sheet is the most important report for any business, as it shows the firm's financial position at a specific point in time. This report essential for every business, but even more so for startups and small businesses since they need to track their financials closely.

A balance sheet represents the following basic equation: Assets = Liabilities + Equity.

The most important piece of this equation is in its name – it must balance.

It begins with assets, then lists the offsetting liabilities and equity. Assets represent resources with economic value that can be converted to cash or used to generate revenues, such as cash, accounts receivable, and fixed assets. They are listed in order of liquidity, with cash shown first.

Liabilities, on the other hand, represent anything owed to other individuals or entities. This includes everything from accounts payable to long-term loans. Equity refers to sources of funding like shareholders as well as retained earnings or losses.

The balance sheet is usually completed at the end of a reporting period, such as month- or quarter-end. Since this represents the total economic resources the company owns, what they owe, and their sources of financing, it rolls forward from period to period.

The balance sheet is useful to analyze relationships like the debt-to-equity ratio, which shows how much of the firm is owed versus owned. Working capital can be computed as current assets minus current liabilities and shows whether a business can meet its financial obligations. These ratios are essential for a startup or small business to understand its current financial strength.

The Income Statement

The income statement reports your business income for a specific period and allows you to see your net gain or loss. Unlike the balance sheet that rolls forward, the income statement is recalculated every reporting period.

The basic income statement consists of two calculations:

Revenue – Cost of Goods Sold = Gross Profit

Gross Profit – Operating Expenses = Net Income

Revenues include everything being recognized in the period, while cost of goods sold represents the total cost of earning those revenues. Operating expenses are other costs that do not directly generate revenue, such as rent, wages, and transaction fees.

Analyzing the income statement allows you to see if your net income was positive or negative for the period. In other words, did you make any profits? You can also use this financial report to see if your operating expenses are too high or inconsistent.

The Statement of Cash Flows

The next report you should review is the statement of cash flows. This report shows the movement of cash in and out. It is separated into the following categories: operating, investing, and financing.

Operating inflows include cash received from the sale of goods and services, as well as interest and dividends. Operating outflows are items like payroll and supplier expenses.

Investing activities are those not directly related to your primary business, and include cash received from selling business assets or cash outflows from extending loans.

Financing activities refer to any cash flows that relate to funding your business, like cash from the sale of stocks or bonds. It also includes paying back loans and paying out dividends.

This report is essential for small businesses to understand their daily spending and liquidity. If you have positive cash flow in operating activities, this is a great sign as it shows that your core business operations are successful. Negative cash flow in the financing activities portion can also be a positive indicator, as it shows that your business is paying off its debts.

Accounts Receivable Aging Report

Using accounts receivable aging reports allows your business to identify slow-paying customers and delinquent accounts. Poorly managed receivables can cause major cash flow issues for a startup, so it is crucial to identify these accounts early on.

This report categorizes receivables by the length of time they are overdue and are generally categorized as follows: 1-30 days, 31-60 days, 61-90 days, and 90+ days.

If collecting receivables is a recurring issue, consider analyzing this report every week.

Budget vs. Actual

Startups should also take time to compare their actual figures to what was budgeted. This can help firms identify overspending and allow management to either reduce future spending or increase budgeting in that area. On the other hand, if there are areas where fewer funds were spent than planned, you may want to consider activities that will spur growth there.

A budget versus actuals report should be analyzed each time a budget is prepared.

We Are Here to Help!

Our experienced team is here to help your startup or small business analyze these critical financial reports regularly. We can help you understand their implications and guide business decisions that will help you effectively run your company. Schedule a free consultation call for more information.