Accounting basics: Understanding the most important financial reports for small businesses

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By Lou Zandrian Lobrin

There are many aspects to running a small business—production, management, finance, and sales and marketing. Staying on top of these aspects is a surefire path to success, which may mean taking opportunities to learn more about them.

Learning more about how your finances work is an integral part of money management. With that in mind, understanding the different types of financial reports is an indispensable skill. Knowing what insights each report can offer will make all the difference in making financially smart business decisions and strategies to move your business forward.

Below are the five most important financial reports you’ll need to know for your small business:

-Income statement: Also known as a Profit and Loss Statement, income statement consists of the total revenue and total expenses incurred over a specified period. This financial report is one of the major financial statements that both management and investors use to analyze profitability and guide them in making significant business decisions.

With a well-maintained income statement, the report can give you exact information on where spending is highest and where most profits are from. It is recommended to review your income statements every month and make comparisons with previous reports. This allows you to observe any patterns or trends that are affecting results, both positively and negatively.

– Balance sheet: A balance sheet is a snapshot of your business’ financial position at a given moment in time—covering its assets, liabilities, and shareholders’ equity. For small businesses, assets may also include bank accounts, accounts receivables, property, equipment, and other saleable physical and intangible property.

By seeing your “bottom line,” a balance sheet should help you keep track of your business’ income and expenses. Ideally, the difference in income and expenditures should be a positive number that grows over time.

-Cash flow statement: This is a summary of how much cash goes in and out of your business over a specific period. It also indicates which aspects are generating or using the most amount of cash. Unlike the balance sheet and income statement, the cash flow statement focuses strictly on the cash activities instead of the entire account.

For small businesses, cash flow can be vital for keeping operations running smoothly. Cash flow statements are useful for estimating incoming or future cash flows, allowing you to manage your budget better and make critical business decisions.

-Accounts receivable aging: The accounts receivable (A/R) aging report contains all outstanding receivable, categorizing them based on the due date and usually with the following categories: current, 1-30, 31-60, 61-90, and >90 days overdue. Staying on top of this report and, by extension, keeping up with collections can help stabilize or even improve your cash flow.

On the flip side, your A/R report can help you pick out potential red flags: previously paying customers who suddenly delay payments, customers who are perpetually late, and individual late balances that continue to increase. The more cash you have stuck in accounts receivable, the less money your business actually has to sustain operations.

-Revenue by customer: Revenue by customer is a report that shows how much profit you’ve made from each customer over a specific time frame. Small businesses, especially freelancers and service businesses, are reliant on a recurring client base for income.

This financial report allows you to identify which clients continue to bring in the most revenue. From there, you can build strategies to nurture your relationships with them better and sustain their patronage. Mastering how to attract new customers and how to get customers to keep coming back is the key to success.

Financial reports: Helping make the right business decisions

Financial reports provide a wealth of information based on money—how much of it you make, how much of it you spend, where it comes from, and so on.

Dealing with numbers and more technical jargon can be intimidating, especially if you’ve had no prior background. However, it is necessary to know how to read and interpret these reports. The information they provide is crucial to making sound business decisions and ultimately helping your business grow.

Running a small business takes a lot of work. With the right tools and a data-driven mindset, you can yield better results.


Lou Zandrian Lobrin is Marketing & Sustainability Manager of Esquire Financing, a lending firm offering non-collateral business loans to Small and Medium Enterprises (SMEs). He enjoys travelling, cultural immersion and meeting new people outside work.

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