When you own your own business and you work there day-in, day-out, you instinctively know what’s working and what isn’t.
But how do you quantify these successes to external parties like investors or new partners? And what do you do when your business grows, or changes, and your existing measuring stick doesn’t work in the way it used to?
The easiest and most effective way to track your business’s performance and health, in a way that’s easily-accessible to a variety of interested parties, is through financial reporting.
Benefits of financial reporting
Financial reporting gives quantifiable data businesses can use to create and monitor performance-based goals. These provide a clear roadmap for the business, which can be used by newcomers or by investors.
Adopting financial reporting and tracking your cash flow and profits also gives you a clear view of your accounts and your business’s health.
There are two key areas affected by good financial reporting: investment decision making and judging management’s effectiveness.
Investment decision making is exactly what it sounds like – it’s how investors see, and what they think of, your business as a prospect. Presenting a clear view of your business’s health to potential investors is essential.
When judging your management’s effectiveness, you should look at how resources are utilised and how the business is run. Reports can help identify areas for improvement in spending and your return on investment (ROI) to maximise your business’s efficiency.
So which reports should you be using?
Key financial reports for investment decision making
The balance sheet gives a quick overview of your financial position on a specific date. It does this by showing what your business owns versus what it owes.
It displays your business’s status in the form of its assets (what you own), liabilities (payments you still owe) and the equity (the amount your shareholders own).
If your business is healthy, the assets will be equal to (balance with) the liabilities and equity. If your balance ratio is less than 1 to 1, then your business could be at risk of facing bankruptcy.
Banks and potential investors require balance sheets to see if your business qualifies for a loan or extra credit. Balance sheets show potential investors what they can expect in return.
Typically, a business with high cash assets represents a strong potential investment and a business that will likely prosper.
When presenting a balance sheet, it is important to present a detailed and itemised report, which will give as clear a view of your business as possible. This will also improve the accuracy of your overall balance.
Another way to improve the professionalism of your balance sheets is to incorporate your own branding into the balance sheet itself, such as including your own logo and colour-scheme.
Cash flow statement
The cash flow statement illustrates a company’s short-term viability and is useful for calculating your ability to cover payroll and other expenses like bills.
This financial report shows the cash generated (cash inflow) and used (cash outflow) over a specified period of time. Cash flow is split into the following activities: operating, investing and financing.
Operating activities can cover payments to suppliers, employees, interest payments, the purchase of merchandise, dividends received and any gains or losses associated with a non-current asset, amongst more.
Investing activities can include the purchase or sale of an asset, loans made or received, and payments including those related to mergers and any acquisition.
Financing activities cover the cash inflow and outflow, including net borrowings, dividends paid, sale or and repurchase of stock.
The cash flow statement provides an informed view of a business’s liquidity and solvency. It’s also essential for seeing how a business can react to future circumstances and changes to its cash flow.
The cash flow statement is therefore very useful for potential investors, lenders and creditors as it gives a clear view of a business’s short-term health.
Key financial reports for judging management effectiveness
Profit & loss account
The profit and loss account does exactly what it says: it shows whether your business has made a profit or a loss over a given period of time.
It does this by showing your total income and your total expenses, and whether your business has earned more income than it has spent on its running costs. If you have, then you’ve made a profit.
A profit and loss account will include your credits (including turnover and other income) and deduct your debits (including allowances, cost of sales and overheads) to find your bottom line figure – either your net profit or your net loss.
It’s an essential report that helps find ways to cut costs in your business by giving a full list of your business debits, and showing how they cut into your profit margin.
The profit and loss account is also known as a P&L report, an income statement, a statement of operation, a statement of financial results, and an income and expense statement.
Both Income Tax and Corporation Tax are calculated based on your company’s profits as seen in the profit and loss account. It’s therefore important to get this report right, as failure to file costs correctly can result in you paying added interest and penalties.
Adopting financial reporting
The key to successfully adopting financial reporting is thinking logically, and making sure you’re including all relevant information in the correct fields.
Knowing which reports to use is an important part of effective overall financial reporting. There’s a host of reports small businesses can run, including asset register, stock overview report, year-end process, aged creditor and debtor reports, VAT reports amongst many others.
The more reports you run, the clearer and more granular a view of your business you get access to.
It’s equally important to know how to file and manage these reports, as incorrect reports can produce inaccurate results and lead your business off course.
There are plenty of report templates available online. Alternatively, you can download an accounting software that incorporates reporting and does the hard work for you.