Although small businesses may think they don’t need complex reports, there are a lot of essential takeaways from financial statements. These statements are useful in different situations for different reasons. As you work with your clients, help them understand how they can use these reports to provide more insight into how their company is doing.
Act Like A Large Company
If your clients dream of growing their companies and scaling their operations, you should consider recommending having them setting up the framework of full financial statements. As they grow, this may eventually become a reporting requirement. If your clients create a process for setting up financial statements now, that process is well established and ready when they need it in the future.
In some situations, your clients are required to have a full set of financial statements. Banks and other financial institutions require financial information prior to issuing business loans. On top of that, if they ever plan on issuing public shares of stock or bonds, your customers must have audited financial statements.
A standard income statement offers a few benefits over using internal reports to show profit and loss. These reports tend to feature default classifications to group similar accounts. By combining certain expenses on the income statement, your clients can know what their total selling and administrative expenses are. The income statement also makes it straightforward to calculate certain margin ratios. Total revenue, gross profit, net income, and net income before taxes are all on a single report.
The owners you work with may have a grasp on operations from an income standpoint, but it is important for them to monitor their assets, liabilities, and equity position. The balance sheet reflects the total of what they own. More importantly, it is a report that shows how liquid their assets are. Because the balance sheet lists assets in order of liquidity, your clients can easily tell if their cash is tied up in assets that are difficult to convert back to cash. The company’s vendors use this information to gauge whether they should extend credit.
On the other side of the balance sheet, your client’s liabilities are all presented in order of maturity as well. The balance sheet lets them visualize when their debt is due and how the total compares to their assets. The balance sheet also reports your client’s book value. If they sold everything their business owned and paid off all debts, their equity remains – and this is a figure that is automatically determined on a balance sheet.
Statement of Cash Flows
For small businesses with small cash balances, the statement of cash flows is another critical piece of internal reporting. This financial statement shows why your client’s cash balance changed from the beginning of the period to the end. Even though it is important to know the ending balance, it is more important for your clients to know what their sources and uses of cash are. They can use the statement of cash flow to track changes in accounts from one month to the next. By seeing the increase or decrease in certain activity like accounts receivable, accounts payable, or other operating accounts, they can utilize and plan their working capital more efficiently.
Not all small businesses have to issue financial statements. Still, these reports can be used in a number of different ways. Whether your clients are looking for a way to get information to external parties or want to make better internal decisions, standard financial statements give a full picture of their organization’s health and can be useful in a number of different ways.