Financial reporting is the secret ingredient to running a successful business. Those without business experience might brush these documents off as complex, but unnecessary, paperwork. However, you can use these reports to improve your business processes and bring in more profit. Understanding this documentation takes time and effort. Fortunately, with patience and professional assistance, you can leverage financial information in your favor and ensure your small business thrives.
Let's look at how financial reporting can serve modern-day business owners and help them reach financial benchmarks.
Financial reports are the backbone of small business accounting and financial management for multiple reasons. Most notably, they provide a clear picture of the most effective practices to keep your business financially healthy.
These statements break down complex data and help you understand your financial situation.
You can then review this data to determine whether reinvesting or growing your business is the next best step. Moreover, financial reports are essential to ensure all business accounts are payable.
A detailed understanding of your finances also simplifies cash flow management, regardless of the size of your business.
But financial reports come with additional benefits that have helped businesses big and small maximize profits with ease and help their bottom line.
Financial statements are likely the first thing potential investors will look at when assessing how lucrative a deal could be. If the numbers add up, they'll see a long-term collaboration as a high-return investment. The same principle applies to crowdfunding.
When reviewing loan and funding applications, potential lenders examine financial statements to gauge whether a business has the capability and means to pay them back. The pandemic has wreaked havoc on the world economy and getting approved for a loan has become more challenging. These market disruptions have prompted governments worldwide to establish relief programs to aid small businesses.
Tax agencies often frustrate businesses as auditing can be long and inconvenient. You can ensure the evaluation goes smoothly when your financial statements are in order.
When you think about selling your business, knowing how well it has performed allows you to ask for a fair price. Accurate reports give insight into the company's upward trajectory and prevent you from settling for meager offers.
Regularly preparing financial statements makes for accurate trend forecasting. You'll spot upcoming market shifts and leverage this information to increase your profit margin.
Additionally, financial statements take the hassle out of annual reporting. Businesses can create comprehensive operational and financial yearly summaries with precise and real-time data. Once shareholders assess the reports, they may provide more substantial financial backing in the future.
Debt management can turn into a nightmare for businesses with poor reporting. An effective strategy should be a top priority for any business that wishes to enjoy financial security.
Although debt is a sore spot for many corporations, transparent data allows you to manage it more efficiently. For this reason, many organizations, including the United Nations, have invested in bolstering their data management and improving their analytics to combat the global debt crisis.
Small businesses benefit from determining the relationship between their assets and liabilities. Understanding which processes generate the most revenue helps develop practices to sustain short-term liquidity and effective debt management strategies. This vigilant reporting approach ensures you get the best return on your money when paying off business debts.
Analyzing financial reports is invaluable for sound decision-making. The insights the reports generate can guide you toward opportunities to streamline business practices by maximizing efficiency, speed, and accuracy.
Most importantly, precise financial data ensures that all business statements align with income tax law and meet reporting standards like IFRS and GAAP. Furthermore, the statements should adhere to laws that protect investors and data security regulations.
Meticulous reporting and accounting make handling tax obligations easier as well. With an easy-to-follow financial trail, auditors can quickly identify areas where the business thrives or falls short.
It's estimated that a whopping 82% of small businesses struggle to recover from cash flow trouble.
No business is immune to cash flow challenges, regardless of its size. The International Labour Organization (ILO) conducted a study in 2020 to analyze the effects of market disruptions. The study indicated that cash flow management was the primary obstacle to long-term solvency for businesses affected by the Covid-19 outbreak.
The good news is that cash flow management doesn't have to be an insurmountable problem. Carefully assessing your KPIs allows you to understand the nuances of your revenue streams and maximize profit by improving future cash flow. You'll be able to implement strategies to fend off unwelcome surprises and use your financial strengths to cash in on new business opportunities.
Access to easy-to-understand financial data is crucial for effective planning, sharing information, and building trust with investors, creditors, and potential partners.
The business becomes more agile through role-appropriate data sharing, ensuring everyone understands their shared goals and benchmarks, spurring collaboration to reach those milestones.
Another way to keep your business in good financial health is by mitigating risk.
When it comes to reducing risk, financial analysis is a handy tool.
You can spot and correct errors and inefficiencies before they become a large-scale emergency. Thanks to new technologies like process automation and artificial intelligence, small businesses can refine their practices and improve their performance even further.
Predictive analytics can also reduce risk exposure. When you're in tune with market conditions, you'll accurately predict changes and tweak your business model to accommodate contingencies.
Financial reports provide clues on how to enhance data security, thus lowering the chance of financial fraud.
Consider the following KPIs when developing a risk mitigation strategy:
You'd think that staying on top of your payment bills is the best way to remain in your vendors' good graces. But in some cases, timely payments can disrupt cash flow management. Sometimes, it's wiser to wait for the due date to bolster liquidity or apply for delayed payment. This shouldn't be a problem when you have strong communication with your supplier.
Building strong relationships takes time and effort. Financial metrics can speed up the process, helping establish a stellar reputation suppliers appreciate and allowing you to get special incentives. Reviewing payment error rates is a foolproof way to develop an optimal payment method that satisfies both your business and the supplier.
Remember that a reliable P2P is a powerful asset for any business, enabling integration with the suppliers' systems, supporting electronic invoicing, and compliance tracking.
The cleaner your reporting is, the stronger your relationships with suppliers become. You can then effectively strengthen the supply chain and take advantage of opportunities to collaborate with new suppliers. Additionally, you'll open doors for product development and sustainable sourcing, significantly boosting your business's financial standing.
Although there are multiple kinds of financial reports, most businesses commonly use the following:
An income statement, also known as an earnings or profit and loss statement, subtracts expenses from revenue and accurately reflects how much a business earns. Income statements are prepared regularly, usually on a monthly or quarterly basis.
This report encompasses multiple revenue aspects, including product sales, cost of sold goods, and gross profit. Next, it dives deeper into expenses, outlining sales, marketing, administrative, and general costs. It also accounts for interest rates and income tax, calculating a business's net income.
This document is the first report small businesses should prepare as it's the foundation of other financial reporting. Without this information, you won't be able to complete the cash flow statement and balance sheet.
A balance sheet outlines a business's liabilities, assets, and shareholder equity. This document is issued monthly or quarterly and is a snapshot of a business's worth after accounting for liabilities and owner payouts.
As a rule of thumb, your balance sheet should display a positive figure. The number stands for your business's value. You can track its fluctuations and see how quickly your business is growing and where it's losing money.
The first part of a balance sheet lists short-term assets, which may include:
The following section typically highlights liabilities or anything the business owes.
Short-term liabilities are accounts payable (debts to other businesses and vendors) and loan and credit card balances.
On the other hand, long-term business loans fall under long-term liabilities.
At the bottom of the sheet, you'll see the shareholder equity, which represents the difference between the business's assets and liabilities. Essentially, it's the money you'd have if your business ceased operations immediately. Lucrative businesses boast higher equity.
A cash flow statement compiles data regarding a business's cash inflow and outflow. It's helpful for short-term planning and cash forecasting.
This document has three categories:
Operating activities refer to your business's main money-making processes. This section tracks cash changes by examining the business's revenue and expenses tied to its products and services.
This category lists financial investments such as stock and the cash flow connected to buying equipment or property.
Financing activities include bank loans, financial backing from investors, and the return investors get.
Optimal cash flow management is crucial for making sound investments, meeting business obligations, and protecting business continuity during crises.
You can access financial performance dashboards through financial software solutions. They offer dynamic reporting and draw from a wide range of sources using a data management platform.
Performance dashboards allow you to create graphs, tables, and charts to analyze working capital, monitor conversion cycles, track error rates, and more.
They're an intuitive way to review financial data and glean insights to streamline business processes and create accurate forecasts.
Although preparing financial statements can be overwhelming, it can set your business up for success when done correctly. It helps you develop the best action plan, cover your expenses on time, and make a profit.
The below guide will walk you through crafting a financial statement that will allow you to stay on top of your numbers.
A user-friendly money-tracking tool can simplify tracking expenses and sales.
Look for software with a well-organized layout that includes expenditures, outgoing salaries, and investment tabs. These features will ensure your business stays afloat and help it bring in big money. Additionally, the reports are just a few clicks away whenever you need to review your numbers.
Narrow down the period you want to analyze. You might want to create a statement regarding your business dealings from the previous week, month, or quarter. When you zero in on the correct period, you'll be able to draft a clean and precise financial report by pulling relevant data.
If you've found a reliable money-tracking tool, you can use it to section off specific timeframes and export valuable data from your financial statements.
Gathering the data is only one part of putting together your report. You need to verify the numbers and ensure they match your financial account. This process usually involves account reconciliation. It should confirm that all your records align.
After verifying the data, it's time to enter the numbers into your report.
Robust financial software usually has multiple report sections, displaying summary pages, sales finance slips, gift cards, liabilities, and total sales. Some even feature product reports categorized by product, POS location, and SKU.
It's a good idea to export a document copy for sharing and saving in Google Sheets or Microsoft Excel.
Although financial statements contain complex information, understanding them helps anticipate market trends, optimize cash flow, and create new growth opportunities for small businesses.
Financial reporting doesn't have to be a tedious task. With the help of a reputable service provider like Swyft Books, you can take your financial documents to the next level. We're here to help you sift through the data, identify weak spots, and devise solutions in no time. Give our software a try and sign up for a free trial to see whether it meets your business's financial needs.