Most people understand that it is vital for a small business to keep its finances and accounting records organized for tax purposes. However, many underestimate how accounting and financial reports can help them make business decisions to improve, grow, and expand. Whether you’re a small business owner or enterprise, you must make your finances work for you. In other words, optimizing your financial decisions should start with your current assets.
There are a few reports that will provide you with a valuable insight into your past, present, and future financial performance. Below are five of the most crucial accounting reports:
1. Profit and Loss Statement
By far, the most significant report for any size business is the Profit and Loss Statement (also known as a P&L or income statement). This report is a breakdown of financial information such as a business’s revenue, costs, and expenses during a given period.
The profit and loss statement is the most useful quarterly and annual report as it quickly shows you your net income or loss (i.e., “bottom line”), as well as many other valuable statistics such as cost of goods sold and administrative expenses.
The P&L is the best way to view your net income. This particular report is generally what lenders or stakeholders will base their decisions on if financing or capital is needed. Your net income is also vital since it is what determines your annual taxable income. This report should be examined at least monthly, if not more often.
2. Balance Sheet
The Balance Sheet is a statement that shows a snapshot of a company’s financial health at a given moment. It includes a company’s total assets, liabilities, and any shareholders’ equity – in other words, what a company has and owes. Assets for most small business accounting usually include bank accounts, accounts receivables, and any investment accounts. Assets can consist of both tangible and intangible property. Liabilities typically include items like credit cards or business loans.
Unlike the P&L Statement, the balance sheet does not merely list your income and expenses. It breaks down your business into a two-sided chart that includes three categories: assets, liabilities, and equity. On one side are your assets, and on the other side are your liabilities and equity. Accountants use one of two simple accounting equations to determine this:
For corporations: Assets = Liabilities + Shareholder’s Equity
For sole proprietors and partnerships: Assets = Liabilities + Owner’s Equity
Assets come in two parts – non-current assets and current assets. Current assets have a lifespan of less than one year, while non-current assets are more long-term.
This “snapshot” is the most effective way to see the true financial status of your company and is used by creditors to determine your company’s creditworthiness.
3. Accounts Receivable Aging
Most people assume everything is taken care of once the work has been completed and the invoice sent to the customer. Unfortunately, that is only half of the battle. Now those payments must be collected promptly. One of the most common sources of cash flow issues for small and medium-sized businesses is poorly-supervised accounts receivables.
The Account Receivable (A/R) Aging report groups outstanding accounts into categories based on their due dates. The categories usually are as follows:
- 1-30 days past due
- 31-60 days past due
- 61-90 days past due
- Over 90 days past due
Regular review of A/R reports will show you running balances and help you identify those customers who are regularly late with their payments and those who typically pay on time. Keep in mind that the more money you have tied up in A/R, the fewer funds you have available for operating your business.
4. Revenue by Customer
The Revenue by Customer Report helps you keep an eye on what customers provide most of your income over a specified period. Business owners should be monitoring this aspect of their financial snapshot as much as they do the A/R reports. Many businesses and industries depend on repeat business from customers as a primary source of income. Even though quality, reliable customers can boost your bottom line, be careful not to rely too heavily on just a few clients (also known as “revenue concentration risk”). If the loss of one customer would ruin your business, it is time to diversify and expand your services.
5. Accounts Payable Aging
Just as you avoid those customers who have outstanding balances or who take too long to pay on their accounts, remember that your vendors feel the same way about you. Your Accounts Payable (A/P) Aging Report helps you monitor what you owe and when it is due. You will be able to maintain a good reputation with your vendors and ensure no due dates are overlooked. Not only can past due A/P accounts ruin your relationship with your vendors, but they can also cost you late fees or forfeiture of any potential early payment discounts.
There are more aspects of financial reporting – for example, a cash flow statement may be what your business needs to track cash and non-cash activity. If you are still not sure where to start when it comes to dealing with important accounting reports, don’t be afraid to seek out a professional CPA. They would be in the best position to advise you on your business finances and concepts such as the Generally Accepted Accounting Principles (GAAP).