What Your Financial Statements Say About Your Business
Did you know that your accounting software automatically generates a few reports for you to use?
These reports can be extremely beneficial when making business decisions, planning for taxes, and reviewing the overall status of your business. Each report gives insight to different aspects of the business.
Let’s discuss three reports I recommend small business owners know and review on a regular basis.
The Balance Sheet
This report shows you the overall value of your business on a particular day. There are three sections that make up this report.
Assets are items that increase the business value (cash accounts, accounts receivable (discussed below, equipment/furniture/buildings, etc).
Liabilities are items that reduce the value of the business (balances due to credit card companies, loans from banks, money you owe vendors, etc).
Equity is the overall owner’s value of the business (money you personally have contributed as capital to the business or the cumulation of income over the life of the business).
The amounts shown on the balance sheet for any particular day should be able to tie to some supporting document, such as a bank statement, loan statement, etc. By reconciling balance sheet balances, it will confirm that rest of the data (at least in total) is accurate.
The Income Statement
This report can be referred to as an income statement or profit/loss statement. The report shows activity for a range of time. We often look at the income statement for a particular year or month. And we can compare a current period of time to a previous period of time to gain information about growth.
This report helps us determine when and how revenue and expenses are generated. Sales/Revenue are located at the top and then our expenses are broken down into their corresponding categories, such as supplies, fees, utilities, rent, wages, office expenses, shipping, advertising, etc. It can be helpful to show expenses as a percentage of revenue as you make management decisions about where and how you are spending money for your business.
The income statement will be used to determine your taxable income for the year and can help you plan on how much you should be setting aside or sending into the IRS quarterly. Your accountant or tax preparer may have a few adjustments to the items reported based on tax laws.
A/R Aging Summary
A/R stands for Accounts Receivable. In order to understand this account, we must first understand the difference between Accrual and Cash basis accounting.
Accrual basis follows the timing of when services are performed or when a sales transaction takes place.
For example: I prepare a tax return and generate an invoice for the service. When that invoice is created, income is recorded. The accounts receivable balance on the balance sheet and sales on the income state would both increase by the amount of the invoice.
However, simply sending an invoice doesn’t have any effect on the bank account balance (or the overall cash position of the business). Cash basis follows the timing of when cash is received or spent. In the example, when cash is received, the accounts receivable balance would decrease and the cash/bank account balance would increase, based on the deposit of the payment. When running an income statement using the cash basis method only, sales that you’ve received payment for will show up in your revenue account. Most small businesses are taxed on a cash basis method.
By reviewing the A/R aging summary report on a regular basis we can see who we have invoiced but has yet to pay us for the work performed. Staying on top of those outstanding balances will help your business cash flow and increase the chances of you actually getting paid.
It may also help identify if a payment was entered incorrectly.
For example: When reviewing the A/R aging summary it shows that Client C owes you $500.00 but you know you deposited a payment from them last week. You can research and find out what happened to the $500.00 that should have gone against Client C’s outstanding balance.
How to get the best results
As with any software program, the information generated on the reports will only be accurate if the data is entered properly and will only be helpful if the software is set up to produce the desired reports. Get your accountant involved. Have them help you set up the file and train you on how to double check and reconcile balances on a regular basis.
Those big plans and goals you have for your business – they’re not going to achieve themselves. And these three reports can be helpful tools to track progress and reach those goals. Each month, I review these financial statements with clients and we celebrate their wins together.
We review what amounts are headed in the direction we’d like them to go and what amounts are out of line compared to our standards. We don’t wait for the end of the year to see how things shook out, we actively make decisions throughout the year based on facts.
Need help understanding your financial statements or getting your accounting system set up? Reach out to your favorite accountant! And if you don’t have one, feel free to set up a call with me – let’s get you heading on the right path to those big goals!
