Many small business owners believe that financial statements are only useful for tax purposes or for securing loans. They think that these documents don’t provide any meaningful insights into their day-to-day operations or long-term goals. This is a myth that can cost them a lot of money and opportunities.
Financial statements are more than just numbers on paper. They are powerful tools that can help you run your business more efficiently and effectively. They can help you monitor your performance, identify problems, plan for the future, and make informed decisions. In this blog post, we will explain the core financial statements for a small business, how to use them as business management tools, and how to ensure accurate reporting.
What are the core financial statements for a small business?
There are three main financial statements that every small business should prepare and review regularly:
Income statement:
This shows the revenue you earned and the expenses you incurred over a specific period of time, usually a month, a quarter, or a year. It tells you whether you made a profit or suffered a loss, and may even offer a prior period comparison.
Balance sheet:
This shows what you own (assets) and what you owe (liabilities) at a specific point in time. It also tells you how much equity you have in your business, which is the difference between your assets and liabilities. Assets equal liabilities plus equity.
Cash flow statement:
This shows how much cash you received and how much cash you spent over a specific period of time. It tells you where your cash came from and where it went in the three categories of operating, investing, and financing, and reconciles with how much cash you have left at the end of the period.
How to use financial statements as business management tools
Financial statements can be used to track your progress, evaluate your performance, spot trends, identify issues, set goals, and make plans. Here are some ways to use them throughout the year:
Weekly:
While you won’t have financial statements reconciled weekly, you may have supplemental schedules for daily or weekly sales, A/R, and A/P. Compare these to your income statement and cash flow statement from the previous period, or your budget, to see if you’re on track. Look for any unusual or unexpected items that may indicate errors or fraud.
Monthly:
Review your balance sheet, income statement, and cash flow statement every month to know your company’s financial health. Compare them to the previous month and the same month last year to see if there are any significant changes or discrepancies. Look for any signs of liquidity problems, such as depleting cash, high debt to equity ratio, or slow inventory turnover.
Quarterly:
Review your balance sheet equity every quarter to see how much profit you retained or distributed and how much your equity increased or decreased. Compare them to your goals to see if you are meeting your expectations or need to revise them. You may want to consider adjusting quarterly estimated tax payments as well.
Annually:
Review all three financial statements every year to see the big picture of your business performance and financial position. Compare them to your industry benchmarks and competitors to see how you stack up against them. Look for any strengths or weaknesses that may affect your competitive advantage or growth potential.
How to ensure accurate reporting
Financial statements are only as good as the data they are based on. If the data is inaccurate or incomplete, the financial statements will be misleading or useless. Therefore, it is essential to ensure accurate reporting of your financial transactions and events. Here are some ways to do that:
DIY:
If you choose to do your own bookkeeping and accounting, make sure you follow the correct basis of accounting, ensure completeness and accuracy, and use reliable accounting software. Record every transaction as soon as it happens and keep supporting documents like receipts and invoices. Reconcile your bank accounts and credit cards regularly and review your trial balance for errors. Hire a professional accountant to review your financial statements periodically and file your tax returns accurately and timely.
Outsourced Accounting Services:
If you want to save time and hassle, or require expertise your company doesn’t have, you can outsource to a professional small business accounting firm. These firms will require you to send them your information timely, and then work with you to complete the task at hand, whether that’s accounting, payroll, or tax planning and preparation. Completeness and accuracy are still vital on your end, as the service can only work with what you give them. However, they will likely be able to point out discrepancies or issues that you weren’t aware of, and help you provide the correct information.
Working with Haworth & Company, Ltd.
If you are looking for a reliable and professional accounting partner for your small business, look no further than Haworth & Company, Ltd. We are dedicated to helping you succeed and achieve your business goals. We have over 30 years of experience and expertise in providing high-quality and affordable accounting, tax, payroll, and consulting services for small businesses. Contact us today to schedule a free consultation and see how we can help you with your accounting needs.
