3 Small Business Reports You Should Know
As a small business owner, you need to stay informed about the financial health and activities of your business. This allows you to understand how much profit you’re making while enabling you to make better decisions for your business. But your time is limited, so you need to narrow down the best small business reports to review each month.
We recommend small business owners set aside the time to create and analyze a balance sheet, a profit and loss report, and a statement of cash flows each month. With these three small business reports, you can gain a strong understanding of your business’ finances from a variety of angles. Learn about each of these reports and how you should use them below.
1. Balance Sheet
A balance sheet, also known as a statement of financial position, shows the net worth of your business on a specific date. It includes your assets and liabilities, which are used to calculate your equity.
Assets are resources you own, such as inventory, equipment, buildings, cash, and accounts receivable. Liabilities include everything you owe to others, such as accounts payable and debts. By subtracting your liabilities from your assets, you can see the net worth of your business.
How to Use Your Balance Sheet
Once you’ve started reviewing your balance sheet as part of your monthly small business reports, make the most of them by following these steps.
Compare your net worth month to month and year to year. An occasional decline in net worth is normal, especially after a large increase the month before. But failure to recover from a big reduction, or especially an ongoing decline, signals trouble for your business.
Watch for inventory increases that you weren’t expecting. If you’re launching a new product, you would expect to see an increase in inventory. But if you aren’t, it may mean sales are stagnating. Dig deeper to see which product isn’t selling, and make a plan to revitalize sales before it loses too much value.
Review accounts receivable to ensure payments are collected in a timely manner. If your current invoice collection process is inefficient, you will notice more and more cash getting tied up in accounts receivable as you grow, negatively impacting your business’ cash flow. Identify the problem early, so you can rectify it before it causes too much damage.
2. Profit and Loss Report
A profit and loss report, also referred to as an income statement, examines your business’ revenue and expenses to determine the net profit over a period of time.
Your revenue includes all sources of operating income, and doesn’t include any deposits from loans. Your expenses include all of your costs, such as payroll, overhead and operating costs, materials and equipment. By subtracting your business expenses from your revenue, you can determine whether or not your business was profitable over that period of time.
How to Use Your Profit and loss report
While balance sheets provide insight into your business’ finances at a particular moment in time, profit and loss reports show your finances over a period of time. This makes them a critical part of your monthly small business revenue reports. Consider the following while reviewing your profit and loss report each month.
Check your income to see what’s bringing in the most money and make sure it’s sustainable. If a large portion of your revenue came from a single event, for example, consider whether or not you would still turn a profit without that event. If not, you’ll want to see if you can count on that event to happen again every year and start planning on how to diversify your sources of income.
Review your expenses to see what stands out. What costs your company the most, and are those costs justified? It can be helpful to look at your expenses as a percentage of your income. See if you notice these percentages going up or down over time.
Compare revenue and expenses to see how you can reinvest profits back into your business and continue your growth. For example, if revenue has significantly increased and the gains are sustainable, you might reward employees with raises and new or improved benefits. You might also consider expanding your business by hiring more employees and moving to a larger office space, buying more equipment, or investing in research and development to improve your current products and services or develop new ones.
3. Statement of Cash Flows
A statement of cash flows tracks the flow of cash going into your business and going out of your business using accrual basis accounting. This report is divided into three categories: operating activities, investing activities, and financing activities.
Everything your business does to produce, sell, deliver, and receive payments for goods and services falls under operating activities. Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets. Cash flow from financing activities show the net flows of cash that are used to fund the company. Financing activities include transactions involving debt, equity, and dividends.
How to Use Your Cash Flow Statement
Understanding your business’ cash flow is a critical first step to learning how to improve cash flow. There are numerous benefits to including cash flow statements in your monthly small business reports, so take advantage of them with the following tips.
Look for positive net cash flow from your business’ operating activities. If your business is profitable, your net cash flow from operating activities should generally be positive and continue increasing over time. Watch out for stagnation and especially continued or severe negative net cash flow. You may be able to offset these issues with loans temporarily, but it’s best to address them quickly to get your business back on track.
Review operating activities for ways to improve cash flow, such as reducing overhead, submitting invoices faster, and accepting additional forms of payment.
Check for investment opportunities when analyzing your investment activities. In order to grow your business, it’s important to invest in your assets. You may need more equipment or space as you gain more employees, and if your current equipment becomes outdated, it will need to be replaced. The goal here is not positive net cash flow from investment activities, which would suggest you are selling assets rather than buying them, but rather regular and sustainable negative net cash flow.
Get Help with Your Small Business Reports
Need help generating, understanding, or acting on these three small business reports? Tower Books provides bookkeeping and business advisory services that can help.
Contact us today for a free consultation about how Tower Books can improve your financial recordkeeping and help you make data-driven decisions for your business.