Every business’ capable management stems from 5 cardinal accounting reports. Financial analysis and reporting are one of the bedrocks of the modern businesses in this era. Keeping a track of the financial health of a business, and its gradual growth and sustenance over time is vital. In its essence, this process entails organizing important business transactions, keep track of invoices for the aforementioned purpose but also for legal purposes.
Created alongside with the development of trade and commerce, accounting has now become the backbone of the financial world that encapsulates all businesses. Every business and organization craves growth and expansion in order survive in today’s market, but every business can also implode when it cannot maintain its financial standards. Accounting enables one to draw comparison, it eliminates any existing financial ambiguity and is the sole means of disclosing a business’ financial status to its stakeholders.
As far as small business accounting is concerned, it is important to keep the company’s financial records up to date for taxes. However, there are many more benefits from small business accounting that you can use to grow, improve and expand your business. Here are some of the most important accounting reports for your small business that you should know about.
1. Profit and loss statement/income statement
The most important report for any business is the profit and loss statement, or as it is more commonly known as the income statement. This report tells you how much money a business makes, in contrast to how much it spends on expenditures. The income statement is one of a company’s central financial statements that shows their annual profit and loss which are determined by adding up all revenues and subtracting from them the operating and non-operating costs. The highlight of this document are the company’s, selling and administrative expenses, revenue, costs, gross profit. Other expenses included, but are not limited to, taxes paid, and net profit. The statement is divided into set time periods that are in coherence with the company’s operations timeline, the most common division being monthly. Because it requires the least amount of information from the balance sheet and cash flow statement, the income statement is the ideal place to begin a financial model making it the sole predecessor to the other core statements that will be discussed further on.
A well-organized accounting operation includes details of where the company spends and where its money originates from. Therefore, each business would have different accounts for its income and spending profiles. The wisest course of action for small business owners is to look at this report on a monthly basis. Simultaneously, it is a good idea to look at trends, draw contrast between the company’s current performance with its performance in the past months of the same fiscal year or even prior to that. This will enable a small-business owner to assess for themselves what works and what can be classified as redundant, consequently, empowering them to focus the profit making elements of their business.
2. Balance sheet
This statement reveals, in Layman terms, your business’s net worth. It deconstructs the financial position of a business by listing the assets, liabilities, and owner’s equity at a particular point in time. The balance sheet also keeps details of previous years in order to allow comparison of a company’s value for two consecutive years. This data will facilitate a company to track its own performance and, consequently, identify ways to build up its finances and find areas for growth and improvement.
For small businesses, assets naturally consist of bank accounts, accounts receivables, and/or investment account. A balance sheet may also include assets like property, electronics and other saleable physical and intangible property. Liabilities generally include credit cards, business loans; essentially anything that you/ your business may owe. The accounting equation states that assets plus liabilities equals equity, this is what governs the balance sheet. The difference in what the company has and what the company owes should ideally be a positive number which grows over the course of time. When examining the balance sheet, also look at the short-term assets versus short-term liabilities.
3. Accounts receivable aging
Irrespective of the scale or how new a business is to the market, your business does not work for free, and your business is most definitely not a charity. Doing the work and sending the invoice is just part of the battle. You also have to make sure those payments get paid and collected. An accounts receivable aging is a report that lists unpaid customer invoices and unused credit memos by date ranges. The aging report is the primary tool used by collections personnel to determine which invoices are long overdue on their payments. Because it is most commonly used as a collection tool, the report may be designed to also contain contact information for each individual customer. The report is also used by management, to determine the efficiency of the credit and collection functions. A typical aging report lists invoices in 30-day “buckets”. The report can also be sorted by customer name, showcasing all invoices for each customer itemized directly below the customer name, sorted by either invoice number or invoice date. The report primarily contains invoices. However, it may also contain credit memos that have not have nowhere near been used by customers, or which have not yet been matched against an unpaid invoice.
The aging report is also used as a tool for estimating potential bad debts, which in turn are then used to review the allowance for doubtful accounts. The usual method for doing so is to derive the historical percentage of invoice dollar amounts in each date range that usually become a bad debt, Then these percentages are applied to the column totals in the most recent aging report.
In simple terms, a small business’ accounts receivable aging report tells the owner how well the company is doing on the collections side. It enables them to be on the lookout for customers who are continuously late, usually pay on time and recently started paying late, and growing late balances from any customer.
4. Revenue by customer
While it is imperative that a small business owner pays his/her dues, it is of equal paramount importance that it be kept in check who pays and how much. This revenue by customer report tells the business owner how much was made from each customer over a set period of time. Freelancers and professional service businesses rely heavily on repeat business in many industries. Building good relationships with quality clients can turn in to a lucrative, reliable, and healthy income stream.
However, it is unwise to put unnecessary amount of faith in any one income source. If too much revenue comes from one source, that is deemed a “revenue concentration risk.” If one client leaving jeopardizes the whole business, then diversifying your clientele is the best course of action to remedy said consequence.
5. Accounts payable aging
The accounts payable aging report categorizes payables to suppliers based on time buckets, which are more often than not 30-day time buckets, so that each successive column in the report lists supplier invoices that are either less than 30, 31 to 60, 61 to 90 or more than 90 days old. The intent of the report is to give the user a visual aid in determining which invoices are overdue for payment. However, it is worth mentioning that this system has one fundamental flaw i.e. this report assumes all invoices are due for payment in 30 days. In reality, some invoices maybe due in days exceeding aforementioned amount. For the report to be effective, it should be periodically, if put delicately, cleaned up, so as to prevent stray debits and credits from being incorporated in the report, making it otherwise congested over time and inevitably more problematic to read and analyze. Furthermore, this report is only useful to auditors if the company’s total matches the ending accounts payable balance in the general ledger.
To put it ever so simply, company would deem it unfavorable if a small business owner did not pay his/her dues on time. This report tells you who you owe and how much. As long as the business’ books are updated, it will be a problem finding who is owed, how much is owed and when is the payment due. Paying late can sour relationships and may lead to penalty fees and other unfavorable costs.