4 Important Financial Reports for Business Owners
The world of accounting can be confusing, especially if you don’t have a background in finance and if math isn’t your strong suit. It can quickly feel like numbers, business jargon and spreadsheets are flying around at high speeds, just looking for an opportunity to throw your business off-track.
The good news is that these financial reports aren’t that hard to understand if you have the right context and a good explanation. We’ve put together a list of the four most important financial reports you need to know as a small business owner. We’ll show you what each one tells you about your business, how to read it, and how you can use this knowledge to introduce a new level of financial stability to your business.
Balance Sheet
Every business needs to be acutely aware of what it’s making compared to what it owes to understand the financial position of a company. A balance sheet is one of the most important financial reports to have because it clearly displays this information.
Balance sheets are broken into three sections: assets, liabilities, and equity. Assets are anything a company owns, such as cash, valuable items, business tools, and accounts receivable. Liabilities are anything that cause cash to flow out of the business on a regular basis. These include accounts payable, debts, loans, and taxes. Equity is the difference between the two.
As you can see from the table below, this report will measure the total value of assets and liabilities and contrast them to reveal your equity. In other words, a balance sheet will show you how much your business is worth - an essential financial health indicator.
This is a basic report, but it is important to keep an eye on the information it communicates. If you find that your liability growth is outpacing your asset growth, you may need to reconsider where you’re spending your time and resources.
Operating Expenses
If you don’t know how much it costs to run your business, it’s going to be difficult to make strategic decisions. Thankfully, an operating expense report makes it easy to track how much you’re paying to keep everything running. It tracks rent, utilities, product costs, wages, and any other regular financial responsibilities associated with running the company.
In the sample below, the operating expense report takes inventory of all expenses and compiles them so they’re easy to see. It’s a simple report, but one that is absolutely vital to track the cost of business activities.
Cash Flow Statement
As the name implies, this report showcases where your money is going over a period of time. It compares the money the company has brought in to the money paid out to operate the business. To calculate this information, a cash flow statement is divided into three sections:
Operating activities
Investing activities
Financing activities
These sections give you visibility into how you generated and spent money for your business over a specific time frame. As we’ve discussed, operating activities are related to how you ran the business day-to-day. They take into account revenue generated from customers, cost of goods and services, wages, etc.
Investing activities are related to how you earned and spent money on long-term assets for your business. These include real property purchases, capital purchases, and even investment pay-offs like dividends. Finally, financing activities are related to how you earned or spent money in the course of financing your business. They include debt payments, dividends paid out, and money brought in from equity or money you’ve loaned.
Below, the example cash flow statement totals these three amounts and displays them by category. Then it totals the amount from each section to display the net cash increase which it will compare to the amount of cash you already had. The bottom line of the report shows your ending cash amount. With this information, you can quickly see how cash is moving in and out of your business.
Income Statement
An income statement, also known as a profit and loss report, shows a business how profitable it is by subtracting its expenses from its revenue and displaying what is left over. If the business is sales-based, then the report may also list the cost of goods sold, which contrasts the cost of goods to the number of units the business sold or has left over.
Unlike a cash flow statement, an income statement will list the various sources of revenue and expense on their own line items. This will let you see where you’re making money and where you’re spending it. It also displays your net profit, while a cash flow statement focuses on how much cash your business has available. Both of these reports may show different information and are both an important part to running and growing a healthy and profitable business.
On the surface, the world of accounting may seem complicated and confusing, and unless you’re trained in it, that becomes true the deeper you dive. The concepts and reports needed to run a company are important and necessary.
If you’re running a business without knowing where it’s heading, you’re likely to end up in some sort of disaster. This is why you need an accountant or accounting team you can trust to crunch the numbers and put these reports together. The reports may look different depending on the software you and your accountant use, but they’re essential, and having someone to put this information in front of you is invaluable. If you’re stuck figuring out advanced accounting software or wrangling spreadsheets, your numbers can get out of whack faster than you can imagine.
As our name suggests, the Profit Firm is here to help businesses achieve financial success and increase profits. No matter where you’re at in your journey, our team of professionals can simplify your accounting so you can put your energy into growing your company. Click here to tell us about your operations and to learn more about how we can help you.
The good news is that these financial reports aren’t that hard to understand if you have the right context and a good explanation. We’ve put together a list of the four most important financial reports you need to know as a small business owner. We’ll show you what each one tells you about your business, how to read it, and how you can use this knowledge to introduce a new level of financial stability to your business.
Balance Sheet
Every business needs to be acutely aware of what it’s making compared to what it owes to understand the financial position of a company. A balance sheet is one of the most important financial reports to have because it clearly displays this information.
Balance sheets are broken into three sections: assets, liabilities, and equity. Assets are anything a company owns, such as cash, valuable items, business tools, and accounts receivable. Liabilities are anything that cause cash to flow out of the business on a regular basis. These include accounts payable, debts, loans, and taxes. Equity is the difference between the two.
As you can see from the table below, this report will measure the total value of assets and liabilities and contrast them to reveal your equity. In other words, a balance sheet will show you how much your business is worth - an essential financial health indicator.
This is a basic report, but it is important to keep an eye on the information it communicates. If you find that your liability growth is outpacing your asset growth, you may need to reconsider where you’re spending your time and resources.
Operating Expenses
If you don’t know how much it costs to run your business, it’s going to be difficult to make strategic decisions. Thankfully, an operating expense report makes it easy to track how much you’re paying to keep everything running. It tracks rent, utilities, product costs, wages, and any other regular financial responsibilities associated with running the company.
In the sample below, the operating expense report takes inventory of all expenses and compiles them so they’re easy to see. It’s a simple report, but one that is absolutely vital to track the cost of business activities.
Cash Flow Statement
As the name implies, this report showcases where your money is going over a period of time. It compares the money the company has brought in to the money paid out to operate the business. To calculate this information, a cash flow statement is divided into three sections:
Operating activities
Investing activities
Financing activities
These sections give you visibility into how you generated and spent money for your business over a specific time frame. As we’ve discussed, operating activities are related to how you ran the business day-to-day. They take into account revenue generated from customers, cost of goods and services, wages, etc.
Investing activities are related to how you earned and spent money on long-term assets for your business. These include real property purchases, capital purchases, and even investment pay-offs like dividends. Finally, financing activities are related to how you earned or spent money in the course of financing your business. They include debt payments, dividends paid out, and money brought in from equity or money you’ve loaned.
Below, the example cash flow statement totals these three amounts and displays them by category. Then it totals the amount from each section to display the net cash increase which it will compare to the amount of cash you already had. The bottom line of the report shows your ending cash amount. With this information, you can quickly see how cash is moving in and out of your business.
Income Statement
An income statement, also known as a profit and loss report, shows a business how profitable it is by subtracting its expenses from its revenue and displaying what is left over. If the business is sales-based, then the report may also list the cost of goods sold, which contrasts the cost of goods to the number of units the business sold or has left over.
Unlike a cash flow statement, an income statement will list the various sources of revenue and expense on their own line items. This will let you see where you’re making money and where you’re spending it. It also displays your net profit, while a cash flow statement focuses on how much cash your business has available. Both of these reports may show different information and are both an important part to running and growing a healthy and profitable business.
On the surface, the world of accounting may seem complicated and confusing, and unless you’re trained in it, that becomes true the deeper you dive. The concepts and reports needed to run a company are important and necessary.
If you’re running a business without knowing where it’s heading, you’re likely to end up in some sort of disaster. This is why you need an accountant or accounting team you can trust to crunch the numbers and put these reports together. The reports may look different depending on the software you and your accountant use, but they’re essential, and having someone to put this information in front of you is invaluable. If you’re stuck figuring out advanced accounting software or wrangling spreadsheets, your numbers can get out of whack faster than you can imagine.
As our name suggests, the Profit Firm is here to help businesses achieve financial success and increase profits. No matter where you’re at in your journey, our team of professionals can simplify your accounting so you can put your energy into growing your company. Click here to tell us about your operations and to learn more about how we can help you.