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 improve, grow, and expand their company. No matter what size your business is, you must make your finances work for you. The best way to make more money is to better manage what you already have.

There are a few financial reports that will provide you with a valuable insight into your past, present, and future economic status and 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 shows a business’s revenue, costs, and expenses during a given period. The profit and loss statement is the most useful report as it quickly shows you your net income or loss (i.e., “bottom line”), as well as many other valuable statistics.  

The P&L is the best way to view your net income. This particular report is generally what lenders or investors 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 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 equations to determine this:

For corporations: Assets = Liabilities + Shareholder’s Equity

For sole proprietors and partnerships: Assets = Liabilities + Owner’s Equity

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:

  • Current
  • 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.

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 accountant. They would be in the best position to advise you on your business finances.