If you’re a small business owner, the quality of your financial decisions depends on the quality of your financial information. Knowing where your money is, where it’s going, and whether your business is on track starts with a proper set of accounting reports.
A small business owner has many tools at their disposal to manage their finances. One of the most important of these is a proper set of books that generate accounting reports the owner can use to make informed decisions.
There are five major reports that a business owner should have access to from their bookkeeping and accounting system:
- Balance Sheet
- Profit and Loss
- Budget to Actual
- Accounts Receivable Aging
- Accounts Payable Aging
A Proper Set of Books: The Foundation of Good Accounting Reports
Before discussing these reports, it is essential to realize that any business must maintain proper books of account that capture and record all financial transactions on a periodic basis, preferably monthly.
Learn more about professional bookkeeping services.
If the numbers aren’t right, any reports will be useless and could lead the owner to make faulty business decisions. Worse, without books, there will be no basis for making any beneficial business decisions.
Top 5 Accounting Reports for Small Businesses
If there is a proper set of books that gets the numbers right, then meaningful reports can be generated. This is best done by an accountant, either as an employee or owner of the business with the proper training (such as a Controller), or by an independent consultant hired by the company, such as a Certified Public Accountant (CPA).
In many instances, the accountant can also be the person keeping the books, although there are times when the accountant needs to be independent of the bookkeeping function. That usually pertains to much larger companies, which is beyond the scope of this discussion.
In discussing these reports, it is important to realize that, although they will be discussed individually, they are very much interrelated and should be used as such, again, with the help of a professional accountant.
1. Balance Sheet: A Snapshot of Your Financial Condition
A Balance Sheet is a snapshot of the financial condition of a company at any point of time. Here is a simplified balance sheet of a typical small business with the most common categories:
| XYZ Company — Balance Sheet | ||
| December 31, 20XX | ||
| Assets | ||
| Current Assets | ||
| Cash | $5,000 | |
| Accounts Receivable | $25,000 | |
| Inventory | $20,000 | |
| Total Current Assets | $50,000 | |
| Fixed Assets | ||
| Land | $50,000 | |
| Buildings | $100,000 | |
| Machinery & Equipment | $60,000 | |
| Furniture & Fixtures | $15,000 | |
| Less: Accumulated Depreciation | ($67,500) | |
| Total Fixed Assets | $157,500 | |
| Other Assets | ||
| Security Deposits | $2,500 | |
| Total Other Assets | $2,500 | |
| Total Assets | $210,000 | |
| Liabilities and Owner Equity | ||
| Current Liabilities | ||
| Accounts Payable | $27,500 | |
| Taxes Payable | $1,500 | |
| Total Current Liabilities | $29,000 | |
| Long-Term Liabilities | ||
| Note Payable – ABC Bank | $65,000 | |
| Note Payable – 123 Bank | $45,000 | |
| Total Long-Term Liabilities | $110,000 | |
| Total Liabilities | $139,000 | |
| Owner Equity | ||
| Capital Contributed | $10,000 | |
| Net Income | $61,000 | |
| Total Owner Equity | $71,000 | |
| Total Liabilities and Owner Equity | $210,000 | |
The Balance Sheet shows the assets, which are items the business owns that are most often used to generate revenue, the liabilities, which are amounts owed to others outside the business that are normally used to acquire assets, and the equity, which is what is left over for the owner(s), also known as the book value of the business (although the real value of a business is what someone is willing to pay for it).
Notice that Assets = Liabilities + Equity – ALWAYS – hence the name balance sheet.
There is a wealth of information included in a Balance Sheet that a business owner should either analyze themselves or in conjunction with their accountant.
2. Profit and Loss: Understanding Your Business’s Operating Results
The Profit and Loss (also known as the Income Statement) shows the results of a business’s operations for a period of time, such as a month, quarter, or year.
Here is a simplified Profit and Loss of a typical small business with the most common categories.
Profit and Loss Example
| XYZ Company — Profit and Loss | |
| For the Year Ended December 31, 20XX | |
| Revenue | $500,000 |
| Less: Cost of Goods Sold | ($300,000) |
| Gross Profit | $200,000 |
| Operating Expenses | $135,000 |
| Net Profit (Loss) From Operations | $65,000 |
| Other Income | $2,000 |
| Other Expense | ($6,000) |
| Net Profit (Loss) | $61,000 |
The Profit and Loss shows gross revenue from product and/or service sales. It is reduced by the cost of goods sold. Cost of goods sold categories vary by company, but in general, think of these costs as those directly related to sales, such as material and labor costs in a manufacturing business or the cost of items purchased to be sold in a retail business.
The key is to identify those costs that normally fluctuate with sales. The result is Gross Profit, a crucial number for any business.
While a detailed analysis of a Profit and Loss is not intended here, realize that if the cost of generating sales exceeds the sales, the company will not be in business long without an infusion of capital from the owner or through loans, and that will merely prolong the outcome. This is also the profit left over to cover general costs.
Operating expenses include advertising, rent, office expenses, and other costs necessary to operate the business but that do not directly affect sales. For example, the office will generate costs even if there are no sales.
Each company’s categories will differ and can be as detailed or as simple as required, though too much detail becomes less than helpful after a point.
Notice that the net profit is also included on the balance sheet shown above.
3. Budget to Actual: Your Plan vs. Reality
A budget is management’s plan to direct and control the business. The budget does not flow from the bookkeeping system, but it performs a crucial function alongside it.
Management should periodically plan for the business’s future. This involves assumptions and goal setting and is purely an educated guess at what they want to achieve – the core of business planning.
Of course, all plans go up in smoke once reality sets in and operations begin, but it is essential to think through what the business intends to accomplish and the assets, revenue, and costs required.
During the planning stage, management/ownership will often look at past results from prior balance sheets and profit and loss statements and use that historical data to project future activity.
Learn more about tax planning and preparation.
Bookkeeping Software
This is normally done in a spreadsheet, though budgeting software is available to help, which may be more costly. The person preparing the budget should use the same categories on the balance sheet and the profit and loss statement. The benefit of this will be apparent in the budget’s control aspect.
Most computerized bookkeeping software allows the entry of budget figures so that the actual numbers generated by the bookkeeping process can be compared with the budgeted numbers on a periodic basis – preferably monthly.
From there, any variances can be identified and either controlled or adapted as needed. Large companies grew in part by performing this task, so it should be good for small companies as well.
Unfortunately, budgeting is often a time-consuming task that many owners feel gets in the way of running their businesses. Most know it is wise to do, but just don’t take the time to do it. They may ask their accountant to do it, but it isn’t the accountant’s business; it’s the owner’s, and the owner is the one who will most benefit from the planning process.
Once the budget is finalized, an accountant can help ensure the books are accurate and analyze variances.
Also, an accountant can certainly provide guidance in the formatting and presentation of the budget but the process should always remain with ownership/management.
4. Accounts Receivable Aging: Tracking What Customers Owe You
For businesses that extend terms to their customers (i.e., give them time to pay), Accounts Receivable Aging is crucial. From an accounting standpoint, this is known as accrual accounting and is a generally accepted accounting principle.
Under accrual accounting, a sale is recorded in the books when the work is done, and an invoice is issued to the customer, giving them a set period to pay, usually 10 or 30 days.
Obviously, if this is not closely monitored, a company can quickly run into cash flow issues. A proper set of books will capture this information, and an Accounts Receivable Aging can be generated from them.
The report typically lists all the customers and how long balances have been outstanding – current (within 30 days), 30–60 days, 60–90 days, and over 90 days. The report can also be presented by invoice if there are numerous invoices for a single customer.
Depending on the terms extended, anything outstanding beyond that time needs to be followed up on and collection procedures implemented if necessary.
Note that the Accounts Receivable Aging is not a primary financial report but is a subsidiary report of the balance sheet and the total of the aging should match the Accounts Receivable on that report at any point in time.
Businesses on the cash basis of accounting do not need this report as a sale is recorded when the work is done and cash is received at that time.
5. Accounts Payable Aging: Managing What You Owe Vendors
This report is similar to receivable aging, except it shows bills the company must pay if its vendors give it time to pay. This is important so that bills are not left unpaid for too long, especially as it relates to the company’s creditworthiness. The presentation is the same, it comes from the bookkeeping system, and it should match Accounts Payable on the balance sheet at any point in time.
Businesses on the cash basis of accounting do not need this report either, as an expense is recorded when paid, not when incurred.
An important aspect of these last two reports – big companies often do everything to speed up cash received while maximizing the time it takes to pay their bills, so, again, it should be good for small businesses too, and these last two reports should help in that process (known as cash management).
Final Thoughts
A proper set of books should ensure that the numbers are right. If they are, then those books should allow for the preparation of these five reports and many others, especially if it is a computerized system.
The business owner should consult with their in-house or outside accountant, such as a CPA, as to what accounts will be useful and how they can be used to make good business decisions.
Need Help Getting Your Accounting Reports in Order?
If you’re a small business owner in Las Vegas and you need help setting up a proper set of books, generating meaningful financial reports, or understanding what your numbers are telling you, we’re here to help.
Contact John W. Reddall CPA LLC today to schedule a consultation. Call us or complete the form on our website to get started.
FAQs about Accounting Reports
All five reports work together, but the Profit and Loss statement is often the first one business owners review because it shows whether the business is making or losing money over a given period.
At a minimum, the Balance Sheet and Profit and Loss should be reviewed monthly. Budget comparisons and aging reports should also be reviewed monthly to identify and address variances or cash flow issues early.
Most computerized bookkeeping software can generate these reports. However, a professional accountant or CPA can help interpret the data, identify trends, and provide guidance on how to use the reports to make sound business decisions.
Cash basis records transactions when money changes hands. Accrual basis records revenue when earned and expenses when incurred, regardless of when payment occurs. Accrual accounting is a generally accepted accounting principle and is relevant for businesses that extend credit terms to customers.
Yes. John W. Reddall CPA LLC provides bookkeeping services, financial reporting, and accounting guidance for small businesses in the Las Vegas area. Reach out to schedule a consultation.