The 7 Most Important Financial Reports for Small Businesses

Startups and small businesses rely on financial reporting to set benchmarks, inform operational decisions, and measure overall organizational health. ​However, many new business owners feel overwhelmed by the breadth of financial reporting available to them. 

​When small businesses utilize well-equipped financial accounting software, confusion can lead to decision paralysis. 

Which financial reports are the most important for small businesses? How often should they be compiled? What kind of historical data is required to run them? What are the consequences of not doing the right kind of reporting?

Small business owners grapple with these questions every day.

Balance Sheet

A balance sheet (also known as a “statement of financial situation”) is the single most important financial report for a small business because it provides a snapshot of a company’s overall finances.
On a balance sheet, liabilities and owner equity are combined to equal all assets.

Liabilities + Owner’s Equity = Assets

Liabilities are comprised of short-term liabilities (like accounts payable and taxes) and long-term liabilities (like debt and personal loans) while owner’s equity includes startup capital and retained earnings. These figures on the left side of the equation balance assets on the right side, which are made up of both current assets (cash) and fixed assets (land, property, equipment, etc.).

While a balance sheet is an essential report for any organization, it is especially vital for small businesses that need to closely track liabilities and assets. Despite not being forward-looking, a balance sheet provides an overview of a company’s entire financial position at a single moment in time, usually at month-end or quarter-end.

 Download a balance sheet template >

Income Statement

An income statement is often referred to as a “Profit and Loss Statement” (or P&L) and is just as vital for small businesses. As the name would imply, a P&L indicates a company’s profitability over a set period (usually the quarter or year) to assess whether it made or lost money.

The objective for the P&L is to project upcoming sales and expenses to arrive at a net profit figure.

Gross Profit – Total Operating Expenses = Net Profit

It is important to note that this equation uses gross profit, which the profit from sales after cost of goods sold (COGS) is subtracted. COGS include things like raw materials, payroll taxes, and overhead costs like equipment repairs and utilities.

Sales – COGS = Gross Profit

Download an income statement template >

Cash Flow Statement

Much like the P&L, a cash flow statement is concerned with a company’s profitability. However, the cash flow statement specifically looks at how much money is coming into and going out of the business at any given time to understand the effect daily operations have on the business’s overall financial position.  A cash flow statement should be prepared each month because inventory is purchased, and expenses are paid on a monthly basis..

Beginning Cash Balance + Cash Inflows – Cash Outflows = Ending Cash Balance

The statement is made up of three types of cash flows – those from operations, investment opportunities, and bank loans or venture capital.

Download a cash flow statement template >

Accounts Receivable Aging Report

Poorly managed accounts receivable (AR) is the leading cause of cash flow issues for small businesses, which is why it is crucial for companies to immediately identify delinquent accounts and slow-paying customers. Refusing ongoing service or additional shipment requests to these customers protects businesses from being taken advantage of to maintain financial interests.  

Categorizing AR by length of time overdue (1-30 days, 31-60 days, 61-90 days, 90+ days) is typically easy for businesses to do automatically within an existing accounting system. Setting this report up to run once a week helps companies take a proactive approach to managing the collections process. 

AR Days vs. AP Days Report

Accounts Receivable Days is the average number of days it takes a business to get paid for products/services, while Accounts Payable Days is the average number of days it takes a company to pay vendors or suppliers. The ratio between these two figures indicates cash availability.

This ratio can vary widely based on industry, so it is crucial for businesses to compare this metric to historical figures internally and to similar companies within the same industry. Periodically putting together this report gives companies a glimpse into how the ratio is changing over time to adjust business operations.
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Businesses that have a poor AR Days to AP Days ratio can choose to change payment terms for customers and/or work with vendors to secure more flexible payment options or shift invoice timing. 

Net Profit Margin over Time Report

Net profit margin is the number of cents in profit that are generated from every dollar of sales. Much like the AR Days to AP Days ratio, there is substantial variation in net profit margin between industries. However, it can also vary seasonally, which is why small businesses should track trends over time. Analyzing net profit margin on a quarterly basis helps manage pricing, expenses, and sales functions.
 
Budget vs. Actual Report

Comparing actual spending to the budget and revenue versus sales projections allows small businesses to determine where budgeting can be improved in the future.

Understanding places where overspending occurred provides an opportunity for businesses to either reduce spending or increase future budgeting in those areas. Conversely, identifying where spending fell short of budgeted amounts helps point to locations where growth activities can occur by doing things like hiring more personnel or investing in more efficient equipment.

A Budget versus Actual report should be compiled any time budgeting occurs to aid in the process. Overspend must be addressed immediately by reducing budget dollars elsewhere while unspent funds can be carried over to pay for other revenue-driving activities.

This basic overview of seven important financial reports should help you better understand the bigger picture. These reports are often overlooked as not relevant or important to all departments. They do help provide the essential information, so you can avoid the meeting where you hear, “your business is profitable, but you are financially bankrupt.”  This seems counter to business logic but happens frequently.

We can Help!

We can help you get these reports completed each month and help you to understand how to use them. If you are interested in getting better reports or want to improve your understanding, please take a moment to Eric Moore here.  We would be happy to help you.