One of the most essential aspects of small business accounting is that
of financial reporting. Financial reports are the documents and records
you put together to track and review how much money your business is
making (or not). A financial report should answer certain basic
financial questions like whether the business is making a profit or
suffering a loss, and how much; how do assets stack up against
liabilities; where did the business get its capital, and is it making
good use of the money; did the business reinvest all its profit; and
does the business have enough capital for future growth? One of the
aspects of small business accounting we will focus on today is that of
financial statements.
The Records
Financial statements are very important and useful to a small business
owner. They show the health and value of your business (Balance Sheet)
and how much profit is being made (Income Statement). Small business
accounting performs the analysis of financial statements in order to see
where the firm is, where it has been, and where it should go. Financial
statements show what is going on with a business. One might say it is
the scorecard by which you measure your business. This is not a new
tool; in fact it can be traced all the way back to the 15th century with
the invention of double entry bookkeeping. Anything you need to know
about your business you can determine by analyzing the financial
statement.
Another reason that a small business accounting
practice might insist on financial statements, is that it is expected.
If your business is ever in a position where they require financial
assistance, need to apply for a loan or line of credit, your lender has
an expectation to see your financial statements. This applies equally if
you are seeking partners or investors. And we do not want to forget our
tax or government reporting responsibility. Financial statements often
need to be filed when you file your corporate tax returns. Preparing
financial statements on an annual basis is necessary, however many
organizations should file quarterly or monthly.
Breaking it Down
There are three major types of financial statements: income statement,
balance sheet and cash flow statements that comprise a significant part
of small business accounting. The Income Statement is a report that
shows your profit or loss for a specified period, usually a month,
quarter, or year. Most small businesses use the cash basis of
accounting, which means we report sales when we receive the money and
report expenses when we pay it. This statement will shop what you
brought in and what a month’s worth of expenses looks like. A Balance
Sheet is a report prepared as of a date in time, not for a period of
time, and it shows your company’s assets, liabilities, and equity. It
will show you what the “value” of your business is in terms of ‘we could
sell our assets to pay off our liabilities and this is what we’d have
left.’ A Cash Flow Statement is a report that shows your cash activity
for a period of time, usually for a year. This will show you how much
money your business earned and used from strictly business operations as
well as from investing and financing activities.