Although small businesses may think they don’t need complex reports, there are many essential takeaways from financial statements. These statements offer information that may increase profitability and help with future expansion. 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 by Issuing Standard Financial Statements
If your clients dream of scaling their operations, you can recommend that they set up the framework to create a full set of financial statements. As they grow, this may eventually become a reporting requirement. If your clients create a process for setting up financial statements now, they have less work to do in the future.
In some situations, your clients must have a full set of financial statements. Banks and other financial institutions require financial information prior to issuing business loans. Plus, if they plan on issuing bonds or stocks, your customers need audited financial statements.
A standard income statement offers a few benefits over 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 see their total selling and administrative expenses. 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 featured on a single report.
The owners you work with may have a grasp on operations from an income standpoint, but it’s also important for them to monitor their assets, liabilities, and equity position. Producing a balance sheet is helpful, as it shows the total of what they own. More importantly, the report shows their liquid assets. Your clients are able to see if their cash is in assets that are difficult to convert back to cash, as the balance sheet lists assets in order of liquidity. If a client is looking for a loan to expand, the company’s vendors may use small business financial reports to gauge whether they should extend credit.
The other side of the balance sheet shows your client’s liabilities in order of maturity. Your client can use the balance sheet to 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 sell everything their business owns and pay off all debts, their equity remains – and this figure is determined automatically on a balance sheet.
Statement of Cash Flows
For small businesses with small cash balances, the standard financial cash flow statement is another critical piece of internal reporting. This financial statement shows why your client’s cash balance changed from the beginning to the end of the period. Even though it’s important to know the ending balance, it’s 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, such as 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, but it’s generally a good idea to do so. Whether your clients are looking for a way to get information to external parties or want to make better internal decisions, standard financial statements provide a full picture of their organization’s health and can be useful in a number of different ways.
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