It’s important to always have a good idea of how your business finances are doing, especially when you are a new small business owner. Something as simple as reviewing your income, expenses, or cash flow statement could give you a better idea of what steps you need to take to move your business forward.
The easiest way to do this? Generate accounting reports, so you can see all the data you need at a glance, helping you make smarter business decisions for the future. And finding the right business accounting software can help make this data easy to track.
Here are the five key accounting reports small business owners should pay attention to:
Probably the most important report to have for your small business is your income statement (also known as the profit and loss statement). It is one of the major financial statements used by external stakeholders (investors, creditors, etc.) as well as internal stakeholders (management, business owners, etc.) to analyze profitability and guide important business decisions.
The income statement consists of your total revenue and total expenses incurred over a specified period of time. You can use this information to determine a total profit or loss to the company over the accounting period.
The income statement is also one of the key reports you will need to bring to your accountant for your small business tax filing. This, along with the balance sheet and cash flow report, will provide your accountant with an overview of how your business did that year, and the information they need to complete your tax filing.
You can also use your income statement to determine which of your products are your best and worst sellers. Just look at which products brought in the most income within a specified time period and then compare it to the previous year or month. How has it changed?
When reading your income statement, keep in mind your basic income statement formula, which is Net Income = Income – (Cost of Goods Sold + Expenses). That’s why this report is also known as the profit and loss report—because it will tell you your bottom line, and whether you’ve made a profit or lost money in that time period.
Your bottom line should be at the very bottom of your report. If this number is positive, it means you’ve earned more than you spent during this time period. If it’s negative, it means it’s time to reevaluate your business spending as well as find ways to increase your income.
Keep in mind that a net loss when you’re first starting out does not mean you should give up on your business. It’s common for businesses to spend more on startup costs, and not turn a profit for the first year (or more).
Whether you’ve used accounting software to build your income statement or you’ve done it yourself, it’s always good to check the math. Go back to your basic income statement formula. Does your Income – (Cost of Goods Sold + Expenses) = Your Bottom Line?
Next, take a look at your income, specifically your sources of income. What source of income is making you the most money? Which sources are the most sustainable? Carefully evaluating your sources of income will give you a better idea of what areas of your business (or which repeating clients) you should focus on for the coming period.
Now that you have this information, take a step back. Do these numbers make sense? Is anything missing that you should be seeing? This category should include your salary and wages, insurance, rent, supplies, interest, and anything else you’re spending money on for your business.
If you’re creating your income statement with accounting software, you usually have the option to add in columns showing previous years’ data, as well. If your document doesn’t show you the percentage change, then calculate these numbers yourself. How has your business been doing compared to the previous years? Are there specific trends you’ve noticed?
Some good questions to ask yourself when you’re comparing year-over-year numbers:
Your balance sheet is the up-to-date picture of your company’s financial position at any point in time. It provides a snapshot of your assets, liabilities, shareholders’ equity, and an overview of your company’s financial position. Your balance sheet also shows the resources that your company owns and owes, as well as the sources of financing for those resources.
This is a great report to use to identify trends within the fiscal year and for making more informed financial decisions. It also provides you with the infamous “bottom line” that your accountant always tells you to keep an eye on. Monitoring the changes on your balance sheet is a good way to keep track of your business’s income and expenses and make sure you’re hitting your targets and staying within your budget.
The balance sheet is also the first document your banks and investors will want to look at when you are looking for small business funding. This will help them understand how their funds will be utilized by your business as well as what kind of returns they can expect to see in the future. It also helps banks and institutions determine whether your business currently qualifies for business loans or lines of credit.
Just like the income statement, your balance sheet also has an underlying formula that it follows. The balance sheet formula is Assets = Liabilities + Shareholders’ Equity. To take it out of its math context, all this formula means is that a company has to pay for all of the things it owns (assets) by either borrowing money (taking on liabilities) or taking from its investors (issuing shareholders’ equity). Your total assets should equal your total liabilities + equity.
The assets on your balance sheet will be categorized into two parts: non-current assets and current assets. Non-current assets are long-term investments which will not be realized or consumed within 12 months of the balance sheet date. Current assets have a lifespan of one year or less, which means they are very liquid and can be easily converted to cash if needed.
Just as there are non-current and current assets, the same goes with liabilities. These are financial obligations that your business owes to external parties. A liability is current when it’s expected to be settled within a year of your balance sheet date. Examples of current liabilities are your accounts receivable, bank overdrafts, cash credits, etc. It is non-current when you have a long-term debt that’s due after at least one year from your balance sheet date.
Your shareholders’ equity is the initial amount of money invested in your business. If you, as the business owner, have invested in your own company, this would be your capital. This portion of your balance sheet will also include your retained earnings. Your retained earnings are the profits your business has earned and kept in the business.
Your A/R aging report shows you all of your outstanding accounts receivable and categorizes them based on the due date, usually in the following categories: current, 1-30, 31-60, 61-90, and >90 days overdue.
Your A/R aging report is what you would use to keep track of your small business cash flow. A poorly managed accounts receivable is actually a common reason why businesses have cash flow problems. The more cash you have locked up in your receivables because you have late payments from customers, the less cash you have for running your business.
Compared to the other reports discussed in this article, the A/R aging report is one of the easiest to read and understand. As mentioned above, your report should typically include several time-frame categories, such as 1-30, 31-60, 61-90, >90, and current. These represent the number of days each client has overdue payments. On the left side of the report, you’ll find your clients column. This will include the name of each client that you have. Your report should also include a date that the report was created, so you know the timeframe you’re working from.
The cash flow statement summarizes the flow of cash into and out of your business over a period of time. It also indicates which areas of your business are generating and using the most cash. It’s different than the balance sheet and income statement because it only considers cash activities rather than all of your accounts.
The cash flow statement is used to estimate future cash flow which will be helpful with budgeting and decision making.
The cash flow statement consists of three sections: operating, financing, and investing activities—each representing a portion of your company’s business activities.
The operations portion shows the amount of cash from the income statement that was originally reported on an accrual basis. This should include the accounts receivables, accounts payables, and income taxes payable. This means once your client pays a receivable or if you pay your supplier in cash, it would be recorded as cash from operations. Changes in current assets and liabilities are recorded as cash flow from operations, as well.
Cash flow from financing reports on the debt and equity of your business. Any cash flows that relate to the payment of dividends, repurchase or sale of stock, and bonds, would be considered activity in this category. If you take out a loan, it would also be recorded here. The investors who prefer businesses that pay dividends, this is the section they would pay attention to, as it looks at cash dividends paid.
Cash flow from investing shows the amount of cash flow from sales and purchases of long-term investments like fixed (non-current) assets. This includes property, plant, equipment, vehicles, furniture, buildings, or even land. In this section, the purchase of these assets will generate cash outflows, and the sale of the assets will generate cash inflows. This is what investors will look at to monitor how much your company is investing in itself.
As much as you should be paying attention to who owes you money via your A/R aging report, you should also determine who’s giving you the most of it. Your revenue by customer report tells you how much you made from each customer over a period of time.
If you run a freelancing business or services business, you will most likely rely heavily on repeat customers. Using this report to determine who your most loyal customers are and who spends the most with your company is a good way to get to know your client base, and who you should be giving more of your time and attention to.
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Different accounting systems include different sets of information in the revenue by customer report, but the most important information to include is a list of your customers as well as the income generated from each customer in a specified time period.
Some revenue by customer reports can include more in-detail data such as customer contact information, items sold, discounts, total tax, cost of goods sold, and even margin.
When using this report to make business decisions, you can add in more columns to compare revenues month-over-month or year-over-year. This will give you a clearer idea of any trends within your sales cycle and whether your customers are dependable repeat business.
With these tools under your belt, you will have the most comprehensive overview of how your business is doing financially, who your best clients are, the state of your cash flow, and even whether or not you qualify for business financing or a loan. Accounting reports may just seem like numbers at first—but once you learn to read and understand which reports are important for running your small business, you’ll be able to make better financial decisions to propel your business forward.