Being a small business owner entails juggling numerous responsibilities. From managing inventory to fulfilling customer orders and managing a small team, it’s easy to become overwhelmed.
However, maintaining accurate financial reports is important to prioritize for any business.
Putting your business’s financial info into a neat and easy-to-understand package is key in business financial reporting. It’s like having a trusty guidebook that shows you where you’re at and where you can go. These reports do many important things, like keeping tabs on how you’re doing, spotting areas where you can do better, and helping you make smart choices for your business’s future.
What is Financial Reporting For Business?
Financial reporting is a fundamental component of small business accounting, allowing owners to generate crucial financial statements. These statements, also called accounting reports, provide comprehensive overviews of essential financial information for a business owner.
Also, stakeholders, investors, and lenders rely on these statements to evaluate the business’s financial well-being.
Usually, financial reporting follows a yearly cycle, where accounting reports are prepared at the close of each fiscal year. But quarterly reporting is also standard if you’re looking for more frequent insight into your financial situation. It’s about what works best for you and updating that financial insight.
You could look at a few different types of financial reports. However, there are three reports you should be looking at consistently to gauge the financial health of your business.
Let’s dive deeper into those three main reports and what they should tell you about your financial performance.
The Balance Sheet
The balance sheet is a financial statement that provides a snapshot of a business’s financial position at a specific date. It reflects the equality of the accounting equation: Assets = Liabilities + Owner’s Equity.
Let’s break that down a little more:
- Assets represent the business’s current, fixed, and intangible assets.
- Liabilities are the company’s obligations, categorized as current and non-current liabilities.
- Owner’s equity reflects the owner’s investment, retained earnings, and stock.
For small business owners, the balance sheet offers very important insights. It helps you assess your liquidity by examining current assets relative to liabilities.
This evaluation informs cash flow management and future planning. Liabilities provide visibility into financial obligations, both short-term and long-term.
Comparing owner’s equity to previous periods helps you track your business’s value, profitability, and sustainability.
Understanding the balance sheet enables a small business owner to gauge financial performance, monitor financial stability, identify risks, and make informed decisions about investments and expansion.
The Income Statement (Profit & Loss)
An income statement, a profit and loss statement (P&L), is like a financial report card for your business. It tells you how much your business has earned and spent over a specific period, like a month, a quarter, or a year.
The income statement tracks your revenue (money earned) and your expenses (money spent). It’s all about understanding whether your business made a profit or a loss.
On the revenue side, it includes sales, even if some customers still need to pay. And on the expense side, it covers payroll, advertising, rent, and insurance.
The important part is calculating your net income or net loss. Net income means you earned more than you spent, while net loss means you spent more than you made. It’s like the final score that shows how well your business did financially.
One helpful thing you can do with an income statement is to calculate your profit margins. Profit margins tell you how good your business is at turning revenue into profits. It’s helpful to see if you’re making the most of your earnings.
Make sure you keep an eye on your income statement. It’ll give you a clear picture of your business’s financial performance, helping you make smart decisions about costs and pricing and set goals to keep your business on track.
The Cash Flow Statement
While the income statement shows your financial performance over a specific period and the balance sheet gives you a snapshot of your cash position, another important report helps track your money’s inflow and outflow: the cash flow statement.
Unlike other financial statements, cash flow statements focus solely on cash transactions and don’t include things like depreciation or bad debt write-offs.
The statement is divided into three sections:
- Operational cash flow – This section looks at cash coming in and going out from day-to-day business operations.
- Investment cash flow – This section focuses on buying and selling assets.
- Financing cash flow – This section covers borrowing, repaying loans, and issuing stock.
By examining these sections together, you can gauge your company’s growth and financial health so you can answer some big-picture questions about your business’s future.
Are you reinvesting operational cash flow into the business or investing in new opportunities?
Are you financing growth or relying on organic growth?
Analyzing these details helps you identify areas of strength and areas that need improvement.
Not only is this report a valuable tool for decision-making. It provides insight into your company’s liquidity, solvency, and short-term viability. It helps you understand your prices, expenses, and accounts receivable. With this knowledge, you can improve your business practices and support growth.
Unlock The Power Of Your Financial Reports
If you are a small business owner, financial reporting is essential to help you improve your business’s financial health and make better decisions.
There are many reports and data sources you could be looking at, but focusing on these three main financial reports will help turn your small business into a growing powerhouse.
But sometimes, financial data can feel like a foreign language to some business owners.
Notion CFO and Advisors provide easy-to-understand financial statement analysis and reporting services. Our specialists go beyond spreadsheets, offering visual representations of your financial data.
Don’t let financial reporting be a foreign language. Discover your numbers’ “aha” moments and make better business decisions.
Let us help you unlock the power of your financial data. Contact us today for a free consultation and start speaking fluent numbers.