“Accounting is the hidden secret behind every successful business. A good marketing plan brings you customers. A great work ethic keeps your customers. Good accounting sustains your business, and tells you where to go next.”
Hello SOTGC community,
When starting a new small business, many entrepreneurs find it difficult to determine which financial reports are important to have. I have been asked this question by small business owners at different stages of their business. Startups need to make sure their business has a good foundation. Businesses in their second or third year need to evaluate how they’re doing and what needs to be changed. No matter what stage your business is at, financial reports will play a huge part in your business running with accuracy, efficiency and effectiveness. There are many different reports that tell a business owner what the “financial” health of their company is.
Why Is Accounting and Reporting So Important?
The primary function of accounting is to record a company’s incoming and outgoing cash transactions. Record keeping helps a business run efficiently and stay on top of where it stands financially. The three main benefits of good record keeping for businesses are; taxes, expense tracking and document organization.
Taxes: Accurate accounting records makes sure preparing the company’s yearly tax returns go smoothly and efficiently. Paying the proper taxes for your business is important. Hefty penalties can apply if your company’s taxes are not calculated properly.
Expense Tracking: Good accounting tracks the monthly expenses for a company. Business owners can see where they are spending too much money and where not enough is being spent in particular areas of their business.
Document Organization: Having a good audit trail and documentation is vital to every business. Good accounting keeps your financial records organized in date order and separated by function. It’s important that information is able to be retrieved quickly when needed.
Here are three most important financial reports you should be looking at
1. Balance Sheet – Shows the financial position of your company. This includes assets, liabilities, and owner’s equity. Included in this report are the company’s cash balances and liabilities. Using the basic accounting equation for your balance sheet works best because it’s easy to create and maintain. As a business owner, the Balance Sheet is where you would look to get to see what the financial position of your business is.
2. Income Statement – Shows the revenue, expenses, and the profit/loss of your company for a specific period of time. Most statements are based on a monthly or quarterly period. The P&L is important because it gives you an idea how profitable your business is overall.
3. Cash-Flow Statement – This report is the most important report for small businesses and startups. The cash flow report allows you to see how readily a company can meet its debt and interest payments. Most small businesses run on cash and knowing where cash is and where it has gone is an important. It’s very easy for a growing business to be profitable, and at the same time run out of cash. Regular review of the business’s Cash Flow Statement will tell you if this is happening.
Whether you are thinking of starting a business or already have one, be sure you are looking at these three reports. Each of one can easily be created in an excel spreadsheet. I always recommend that business owners invest in an accounting program to keep accurate records. Also, all accounting programs will create these reports for you.
Accounting reports serve an important role of telling the company’s financial story. Understand your reports; understand the doors that are open and closed to you. Financial reports tell the past, present and future of your business. The past is the decisions you made in the beginning and how they affected your financial gain or loss. The present is the quick snapshot of what decisions you are making right now. The future is what you decide to do with the information these reports has given you. How you use this information is the defining factor of your business growth or its demise.
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