What Financial Reports Does a Business Need? Beyond the Income Statement
Running a business involves more than just keeping the lights on and the products moving. To make informed decisions, you need to have a clear understanding of your company's financial health. This is where financial reports come in. But what exactly do you need beyond the balance sheet and income Statement? Let's dive in.
Financial Statements vs. Other Financial Reports
Before we explore the different types of financial reports, it's essential to distinguish between financial statements and other financial reports.
Financial Statements are relatively standardized financial reports that show the financial activities and position of a business, person, or other entity. There are four main financial statements: balance sheet, income statement, statement of cash flow, and the statement of shareholders equity.
Balance Sheet
The balance sheet, also known as a statement of financial position, provides a snapshot of your business's financial condition at a specific point in time.
It includes:
Assets. What the business owns (e.g., cash, inventory, prepaid expenses, intangible assets, property, plant, and equipment)
Liabilities. What the business owes (e.g., loans, accounts payable)
Equity. The owner's claim after subtracting liabilities from assets
Income Statement
The income statement, also known as a profit and loss (P&L) statement, shows your business’s revenues and expenses during a particular period—usually a month, quarter, or year.
An income statement includes:
Revenues. Money earned from sales or services and non-operating revenue.
Expenses. Costs incurred to earn the revenue
Net income. Revenue minus expenses, indicating profit or loss
Statement of Cash Flows
The cash flow statement (CFS) summarizes the cash inflows and outflows from operating, investing, and financing activities over a particular period.
The statement of cash flow shows:
Operating Activities. Cash flows from the company's core business activities
Investing Activities. Cash flows from the purchase and sale of assets
Financing Activities. Cash flows related to borrowing and repaying debt, issuing stock, etc.
The cash flow statement reconciles cash at the beginning of the accounting period to your ending cash balance.
Statement of Owner/Shareholder Equity
This shows changes in shareholder equity or the owners' interests over time, including capital contributions, withdrawals, and retained earnings.
Depending on your needs, you might need financial statements that conform with U.S. Generally Accepted Accounting Principles (GAAP) or issue tax-basis financial statements that follow the rules of the U.S. tax code and focus on your business's cash transactions.
Other financial reports provide additional insights beyond the basic financial statements. You can tailor them to your specific needs. These reports don't have to follow the same standard framework as financial statements, but they can be invaluable for running your day-to-day operations and making financial decisions.
Other Beneficial Financial Reports
Beyond the core set of financial statements, other reports can provide additional insights to help manage your business effectively.
Accounts Receivable Aging Report
An A/R Aging Report tracks outstanding customer invoices (money owed to your business) and their due dates, helping you manage collections and cash flow. Reconciling this account monthly ensures your customers pay on time so you can maintain cash flow.
Accounts Payable Aging Report
An A/P Aging Report lists unpaid supplier invoices (money towed by your business) and their due dates, assisting in managing your payables. Reviewing this report monthly ensures no bills slip through the cracks and helps you maintain good supplier relationships.
Budget vs. Actual Report
Sticking to a budget helps you spend money in alignment with your goals so you can afford to maintain operations and keep the lights on. A Budget vs. Actual Report compares your actual financial performance against your budget. While some variances are inevitable, understanding those variances and adjusting your budget accordingly helps you stay on top of your company's financial performance.
Sales Reports
A Sales Report breaks down sales by product, region, or sales representative, providing insights into what’s driving revenue and where improvements can be made.
You might also want to track activities that lead to sales. For example, you might track the number of sales calls or meetings scheduled with leads. While these aren't financial metrics, monitoring sales and marketing activities is a great way to stay on track toward your monthly, quarterly, or annual sales goals.
Cash Forecast Report
Many reports we've mentioned so far focus on the past, but sound financial management also requires some foresight. This is where a cash flow forecast comes in. A cash forecast estimates the money coming into and going out of your business over a future period.
Forecasting cash flow is essential to avoid being short on cash, which makes it difficult to pay for expenses incurred and cover employee wages. Most experts recommend maintaining at least a 13-week cash flow forecast.
Inventory Reports
If your business involves carrying inventory, Inventory Reports track inventory levels, turnover rates, and stock valuation. These reports help manage inventory and reduce carrying costs.
Accounting Software: A Tool for Managing Your Company's Financial Performance
Accounting software can significantly streamline generating and analyzing these and other reports. Modern software solutions like Xero and Sage Intacct offer various features that help business owners:
Collaborate with their accountant or bookkeeper to track operating revenue, operating expenses, and net income in real-time
Access up-to-date financial information to make timely decisions
Automatically update and generate financial statements to save time and reduce errors
Tailor reports to fit your specific needs, allowing you to focus on what matters most to your business
Connect with other business tools (e.g., CRM, payroll) for comprehensive financial management
Stay on Top of Your Company's Operations with Slate Accounting
Understanding and utilizing a variety of financial reports can give you a clearer picture of your business’s health and help you make better-informed decisions. Whether tracking sales performance, managing cash flow, or ensuring timely collections, these reports are indispensable tools for any business owner.
If you need assistance setting up these reports or have questions about your business's financial health, schedule a call with Slate. We can help you stay on top of your accounting, select the types of financial statements most useful to you, and read financial statements to get the insights you need to manage your business better.