Financial reporting for startups can be a daunting process. There are so many different reports to read, and it is hard to know which ones are the most important or how they all fit together. This guide will help you understand what financial reports are available, why you need them, and how to use them in your business decisions.
When small companies use well-equipped accounting software, ambiguity might cause paralysis of action.
What are the most crucial financial reports for small companies? How often should they be prepared? What kind of historical data is necessary to run them? What are the consequences of not doing the appropriate sort of reporting?
These issues confront every small company on a regular basis.
The single most important financial document for a small firm is the balance sheet (also known as a “statement of financial position”) because it offers a picture of the company’s overall financial status.
On a balance sheet, the liability and owner equity sides are combined to equal all assets.
- Liabilities + Owner’s Equity = Assets
Liabilities are divided into short-term and long-term liabilities, whereas owner’s equity includes startup capital and retained earnings. The two sides of the formulas are well balanced by the figures on the left, which include both current assets (cash) and fixed assets (land, property, equipment, etc.).
A company’s balance sheet is important for any firm, but it is particularly necessary for small enterprises that must keep track of liabilities and assets. A balance sheet provides a comprehensive picture of a business’s financial position at a specific moment in time, usually at month-end or quarter-end, without being overly forward-looking.
The income statement is frequently referred to as a “Profit and Loss Statement” (or P&L) for small enterprises. A profit & loss is a financial statement that indicates how profitable a firm has been over a certain time period (usually the quarter or year) to determine whether it made or lost money.
The goal of the P&L is to project future sales and expenditures in order to calculate a net profit figure.
- Gross Profit – Total Operating Expenses = Net Profit
It’s crucial to remember that this formula uses gross profit, which is the difference between sales revenue and the cost of goods sold. COGS can be defined as everything from inputs to manufacturing overhead, such as raw materials and payroll taxes.
- Sales – COGS = Gross Profit
Cash Flow Statement
A cash flow statement, like the P&L, is concerned with a company’s profitability. However, the cash flow statement focuses on how much money comes in and goes out of a firm at any one moment to determine the business’s overall financial position. A monthly cash flow statement is required because materials are acquired, and costs are paid on a monthly basis.
- Beginning Cash Balance + Cash Inflows – Cash Outflows = Ending Cash Balance.
The cash flows that make up a business’s financial statement are divided into three categories: those from operations, investment opportunities, and bank loans or venture capital.
Accounts Receivable Aging Report
The most common cause of cash flow difficulties for small firms is poorly managed accounts receivables (AR), which is why it’s critical for businesses to identify delinquent accounts and slow-paying clients as soon as possible. Customers who have been cut off or prevented from receiving merchandise or services because they refuse continual service or extra shipment requests are not only harming themselves but also their customers and the company as a whole.
Categorizing AR by the length of time overdue (1-30 days, 31-60 days, 61-90 days, 90+ days) is usually simple for businesses to automate in an existing accounting system. Setting up this report to run once a week encourages employers to take a proactive approach to the collections process.
AR Days vs. AP Days Report
Account Receivable Days is the average number of days it takes a business to get paid for goods or services, while Accounts Payable Days is the average number of days it takes a firm to pay suppliers or vendors. The differentiation between these two numbers indicates how long money will last.
This figure varies widely by business, so it’s critical for businesses to compare this statistic against previous years’ data as well as those from comparable firms within the same industry. This report is useful for business owners who want to understand how the equity-to-liabilities ratio has evolved over time so that they can make adjustments in their operations.
A poor AR Days to AP Days ratio can result in companies altering their payment terms for clients or negotiations with suppliers to obtain more flexible payment alternatives or shift invoice dates.
Net Profit Margin over Time Report
The percentage of a business’s earnings retained after taxes. It is also known as the profit margin, and it is calculated as a percentage. Net profit margin varies considerably across industries, much like the AR/AP Days ratio. Small businesses, on the other hand, should track patterns across time. On a quarterly basis, net profit margin analysis allows you to keep an eye on pricing, spending, and sales functions.
Budget vs. Actual Report
Small firms may use this method to compare actual spending to the budget and revenue versus sales expectations.
Management can identify areas where expenses were overspent, allowing businesses to reduce costs or improve future budgeting in those areas. Conversely, noting where expenditures fell short of planned amounts can help you spot areas where new activities may be undertaken by hiring more personnel or investing in more efficient equipment.
A Budget versus Actual report should be generated at any time budgeting occurs to assist in the process. To avoid Overspending, reduce budget amounts elsewhere while unspent resources can be carried over to cover for other revenue-generating activities.
This brief discussion of seven crucial financial reports should assist you in seeing the big picture. A lot of these reports are often disregarded as unimportant or unneeded by most departments. They can help you obtain the key facts, so you don’t have to attend a meeting where someone tells you that your company is successful but financially bankrupt. This appears to go against basic business sense, yet it happens all the time.