Many business owners would agree that good financial information is essential to managing a healthy business.
That is why financial reporting is one of the bedrocks of businesses at various levels. However, many small business owners presume that they don’t need complex reports to run their business effectively.
Of course, there is so much to deal with in business, things such as sales, marketing, inventory, services, etc. With all of these on their plate, it’s no wonder why examining financial reports isn’t at the top of their list. But financial reporting plays an important role in every company’s financial health.
If you’re uncertain whether or not financial reporting is worth the time and effort, we’ve covered several ways how your small business can greatly benefit from it.
Improve Decision Making
Your decisions can either make or break your business. Because every decision-making process requires information, you have to ensure that the data you’re drawing from are fact-based and relevant. If not, you’re likely to make decisions that could badly hurt your business’s financial health.
But your business’s financial reports can be excellent sources of data. They can show you significant trends and tendencies within your business. Instead of making decisions based on gut feelings, you have an objective basis of your business’s performance over a certain period. Thus, you’d be able to see areas for improvement, development, and opportunity.
Spot Potential Problems
Most problems in the business are not sudden. There are often early indicators of future financial challenges. But unfortunately, many fail to recognize them because they don’t take financial reporting seriously. They don’t view their financial reports as a useful management tool for spotting potential problems on the horizon.
Note that undetected challenges can grow over time. Once they do, solutions may become more costly and time-consuming. Or worse, the damages they caused to your business might be irreparable. Although there are always uncontrollable events, reviewing your financial reports can allow you to identify warning signs and decide on a course of action.
Enhance Debt Management
Debts can cripple the progress of any business. However, they are beneficial if they are at a manageable level, debts allow many businesses to avoid serious cash flow issues and speed their growth. But it’s a problem when debts become excessive, and they quickly do, especially if there is no proper accounting.
But with accurate financial reporting, your business can stay on top of your bills, debts, and other liabilities. As you can easily spot potential problems in your business through its financial reports, you’d be able to resolve any debt-related issues as soon as possible. Note that financial reports are also essential when you’re planning to get credit or a business loan.
Track Business Progress
Every company needs to keep track of how their business performance is going. But it’s even more so with small businesses. With limited cash flow, every financial decision and activity that small business owners make is crucial. Doing so can help you adapt to any variances that arise unexpectedly and quickly.
However, that’s only possible if there is an accurate disclosure of financial data. This is where financial reporting comes into play. With timely reports of income, expenses and other relevant financial information, you can assess whether your business reaches or falls short of its target goals.
Identify Business Opportunities
Appropriate financial reports can provide insight for investors and creditors regarding your company’s financial integrity and creditworthiness. Thus, they will want to see your business’s financial records before they decide to do any business with you.
By looking at your financial reports, you can identify any opportunities that your business can venture on. It will help you see whether or not you have enough funds to expand your company. Hence, you can make more informed decisions regarding your business’s future growth.
Secure Regulatory Compliance
Regulatory compliance is one of the responsibilities that businesses have to take into account. Federal, state, and local agencies will require you to submit tax returns on time. Of course, you won’t be able to comply without accurate financial reports in place.
If your business is subjected to an audit, you will also have to present financial statements to ensure that you stay compliant with the laws and regulations. Note that you’re also obliged to provide financial reports to your debt holders, investors, and other key stakeholders.
Once your business grows and has beneficial owners, financial reporting is even more crucial. They are required to file reports regarding ownership with the SEC (Securities and Exchange Commission). Nevertheless, the reporting person may take a look at this page https://www.facebook.com/public/Simon-Posen.
Key Financial Reports That You Should Not Miss
Financial reports are made of several accounts, which are all important in determining the business’s financial health and performance. However, there are financial statements that you have to pay more attention to.
We’ve highlighted the following key financial reports that you should not miss and how you can make use of them.
The Balance Sheet
The balance sheet indicates the current net worth of your business. It does this by showing what your business and its shareholders own versus what it owes. If they are not properly balanced, it’s an indicator that you have to take financial action.
Moreover, the balance sheet is an excellent tool that gives you essential financial information in real-time, such as sales, income, and liabilities. By reviewing it, you can make decisions right away.
The Cash Flow Statement
The cash flow statement shows your business’s short-term viability. It is most useful in calculating the company’s capacity to cover expenses like payroll and utility bills. Since it provides an informed view of your business’s liquidity and solvency, you can discern whether or not it’s ready to face future financial challenges.
Similarly, any issues with a cash flow statement are often warning signs to an uncertain financial future. Remember that cash flow is the lifeblood of every business. Thus, make sure to take care of it.
The Income Statement
The income statement illustrates your business’s total income and expenses. By taking a look at it, you’d be able to evaluate whether your business has earned more income than it has spent on its expenses. It also helps you find ways to cut costs in your business when necessary.
Note that the balance sheet and income statement are the key financial reports for investment decisions. But for judging your business’s management effectiveness, it’s the income statement.
While it’s easier to take financial reporting for granted, the consequences may hurt your business. If you want to ensure your business’s future growth, you must protect its current financial health by giving importance to every financial report. Bear in mind that knowing what reports to use is a critical step to effective financial reporting and analysis.