Running a small business is complicated. Owners have to deal with sales, marketing, employees, customer service, and more. With all of this on your plate, it’s no surprise that financial reports may not be at the top of your daily priorities.
The truth is that keeping up to date on the details of your finances is too important to ignore. Regular analysis of key financial reports can make the difference between success and failure for a small business owner.
Key Financial Reports
The process of producing detailed statements that disclose a business’s financial status to management, investors, and government agencies is known as financial reporting. Financial reporting involves following standard accounting practices to give an accurate picture of a company’s finances, including:
- Revenues
- Expenses
- Profits
- Capital
- Cash flow
There are three financial statements that serve a critical role in communicating the financial status of a business. Income statements, balance sheets, and cash flow statements are financial reports that every business owner needs to understand in order to run a profitable enterprise.
Income Statement
An income statement shows how much money a business has made or lost in a given time period. It’s important because it indicates the profitability of a company’s current operations. By having accurate figures, a business owner can make fast decisions that would otherwise require unreliable guesswork.
Balance Sheet
A balance sheet tracks the assets, liabilities, and owner-held equity for a business at a specific point in time. It’s important because it indicates the approximate cash value of a business. Potential lenders look at balance sheets to assess collateral and risk, which affects the likelihood of receiving funding for your business should you need it.
Cash Flow Statement
This report shows how much money flowed in and out of a business in a specific period of time. The cash flow statement is critical for ensuring you have enough cash on hand to make payroll. Large discrepancies between the cash flow statement and the income statement can also help identify problems in your business operations.
Reasons to Make Financial Reporting a Priority
Not maintaining accurate financial records is one of the most common mistakes for new business owners and it is one of the top reasons small businesses fail. The information revealed through accurate financial reporting has a huge impact on the success of a business. Here are five ways that accurate and timely financial reporting helps small business owners:
1. Realistic Budgeting
Budgets allow a business owner to not only plan for immediate expenses but to analyze expenditures and make adjustments for future spending. With accurate financial records, you can budget for future financial needs, such as emergency repairs, improvements, and expansion without the need to rely on emergency credit or loans.
2. Easier Tax Preparation
With proper organization of your financial records, you won’t have to scramble for receipts and invoices when it’s time to file your taxes. With your financial statements and supporting documentation in order, tax preparation is less time-consuming and stressful.
3. Better Decision Making
When you have accurate financial reports at your disposal, you can use that information to make better decisions about your business. Up-to-date financial records allow you to identify all of your assets, expenses, income, and liabilities. This lets you see the strengths and weaknesses of your business and make better financial decisions.
4. Quick Error Detection
Accounting errors can be minor or substantial. Either way, they can have serious consequences if left uncorrected. Putting internal controls in place helps ensure accurate financial reporting. Conducting bank account reconciliations each month allows you to catch and correct errors quickly. Reviewing credit card statements monthly ensures that charges have been correctly entered into your accounting system.
5. Avoid IRS Audits
Businesses are required by law to keep accurate records of all of their financial transactions. These records are eventually used to file tax returns. Irregularities or problems in reporting trigger the possibility of an audit. In the event of an audit, you will need to open your records to the IRS for proof of income, expenses, and more. And if you do get audited, accurate financial records will make the process easier to handle.
Professional Accounting Services Can Help
Many small business owners and entrepreneurs try to tackle financial reporting and planning on their own. Simply running the daily operations of a business, sending out invoices, and paying bills usually takes priority in a typical day’s business activity. Reviewing, analyzing, and reconciling financial statements gets pushed aside. That’s why outsourcing your bookkeeping and accounting tasks may be the best option.
An experienced accounting firm will be able to handle all of your financial reporting needs quickly and accurately. They will also be able to help you learn to read and understand your financial statements so that you can use them to improve your business operations.
At Nolan Accounting Center, we pride ourselves on building strong relationships focused on success. Because our firm is relatively small, our clients benefit by receiving personalized service.
We provide a full range of accounting, tax preparation, bookkeeping, and payroll services to small business owners in Southeast Wisconsin. We look forward to working with you to meet your financial goals.