Running a small studio or fitness business? Once you figure out that bookkeeping and accounting for small businesses is crucial, you are ready to learn how empowered you can be with these three simple reports. This article assumes you are already using an accounting software, such as Quickbooks. If you are wise enough to outsource this to an accountant, then this article still applies to you, because every business owner needs to be in touch with these three financial reports from the accounting software/accountant.
“My accounting software has reports that can be generated at the click of a mouse. But there are scores of them. I don’t have the time nor the know how to make sense of all these. What the heck should I do?!”
– Says many an entrepreneur.
The process of mechanically generating timely and accurate accounting records is very important and should be a high priority of your business.
But just as important is to not undertake this process for the sake of doing so, saving the records, and moving on. Instead, take advantage of the incredible insights these records provide!
Nowadays, data can be sliced and mined in ways previously unimaginable. And even basic accounting systems aren’t lacking in the volume of standard reports they offer. Many of these reports can be of value in various elements of your business, but with this abundance of data, where’s it best to begin?
This article tackles the high-level basics. Three key reports require your attention each month. These reports provide looks at your business as a whole and offer quick and valuable insights into your business’ results and financial health. Get going on these now!
Picture a camera taking a photo of everything your business owns and owes at a point in time. Voila. You are picturing a balance sheet. Not that difficult, right?
This “photo” that is the balance sheet is presented in three sections:
Assets are what your business owns.
What it owns can include:
- money markets/short term investments
- accounts receivable
- prepaid items (e.g. insurance)
- long-term investments, property
- intangibles such as intellectual property
Smaller value items that your business technically owns, such as paper clips and flash drives, are not shown on the balance sheet. They are recorded on the income statement (see the Income Statement section below).
Liabilities are what your business owes.
These can include items like:
- accounts payable
- accrued salaries
- interest payable
- mortgage and other notes payable
In the accounting world, your business’ equity is simply the difference between its assets and liabilities. It in effect “balances” the two.
Equity takes on various monikers depending on your business’ structure, including:
- owner’s equity
- shareholders’ equity
- stockholders’ equity
The second report, the income statement, however, shows the revenue and expenses of your business between two dates. (The income statement is also known as a Profit and Loss Statement or P&L.) The difference between revenue and expenses is known as net income, or net loss if expenses are greater. More simply:
Revenue – Expenses = Profit (or Loss)
Note the distinction between the Balance Sheet and Profit and Loss Statement… The balance sheet is a snapshot; a point in time portrayal. The income statement shows activity between two points in time.
An income statement can take on many formats, depending on what is most appropriate for a given business. For example, some companies opt to show a subtotal of revenues and the direct costs of those revenues, with administrative and other expenses displayed separately. Other businesses simply present their entire base of revenues and expenses separately.
In that the income statement may include activity that does not affect cash, analysis of the Cash Flow Statement provides a summary of your business’ cash activity between two points in time.
Activity on this report is segmented between operating, investing, and financing categories. You will likely find that yours is quite simple and easy to understand.
Uhhh… So what do I do?
You have these reports you or your accountant can create in your accounting software. Now what do you do?
Start simple. Take a look at each line item to see where your business is (the balance sheet) and how it has performed (the income statement).
Specifically, use them to always be aware of things like:
- How much cash does the business have?
- How much do customers/clients owe?
- How much are vendors owed?
- Is there enough cash to fund current liabilities?
- Is the business making a profit?
- How much revenue was generated?
- How much was spent on payroll? Or rent?
Questions along these lines will likely compel you to dig further, which is beneficial to you and your business.
Ask yourself if the amounts align with expectations or perceptions you might have. Compare them with prior periods (most accounting software can generate comparative reports), such as vs. last month or last year-to-date. If you utilize a budget, compare the results with what was planned. Address questions and concerns accordingly.
You will develop comfort and confidence quickly from vigilantly utilizing these reports. Over time, you’ll become more at ease incorporating more complex measures and ratios that yield even greater information. You’ll also gain conviction speaking to your business’ performance with fellow owners, board members, investors, and external parties.
And very importantly, these three reports will you position you favorably to identify problems, opportunities, and overall better manage your business!
Tim Hari is a CPA with extensive experience in public accounting and senior operational finance roles in the professional services industry. Tim provides accounting and consulting services for professional services firms and startups. He can be reached at email@example.com.