most important financial reports for small businesses

The 3 Most Important Small Business Financial Reports

When you’re starting a business or managing a small business, your finances are important to get right to make sure your business is on track for success. You need to know how your business is spending money, how your business is making money, and how productive your business is at making money. Financial reporting plays a big role in your business’ overall success and provides helpful markers for your businesses health. 

But if your eyes glaze over at the idea of reading financial reports, knowing which reports are the most important can help save you a lot of time and heartache of figuring out your small business finances. 

It’s crucial that you have an understanding of the meaning and importance of financial reporting for your business. But before you start digging into financial reports for your small business, knowing which ones are the most important and what they mean can be a huge help.

When I work with clients as their virtual CFO or to teach small business financial literacy, I always turn to a handful financial reports to get a picture of the financial health of the business. 

Time Tracking Reports

I personally believe that one of the most important financial reports that you can use to take your business to the next level is time tracking reports. That might strike you as a pretty odd suggestion, since most business owners view time tracking as an HR thing rather than a financial thing. 

But if there’s one thing you have a limited amount of in your business, it’s time. Even if your business scales and becomes more profitable, time doesn’t tend to grow as quickly as other resources in your business. As well, how productive those hours are in your business at making money is one the hardest hurdles to overcome as you scale and capacity is limited.

Time tracking reports can tell you:

  • Where you’re spending time
  • What is the most profitable use of time 
  • Where you’re wasting time 

Setting up time tracking is as simple as using a free app, like Toggl, or integrating a timer into your project management system. It’s always one of the first things I tell my clients to start doing if they’re not already.

To give you the full picture, time tracking should not only include billable hours like client work and time spent creating products but also non-revenue generating time. From there, you can look at time reports to see how you spend your time affects your ability to make your business profitable.

Most business owners don’t use time tracking from a financial standpoint but a quick peek into what time is most profitable can be very revealing for your business. Even if your business is focused on selling digital products or goods, knowing where you spend your time can tell you what is the best use of your resources. Time tracking can also clue you into why your business isn’t making enough money because you’re spending time on the wrong things.

If time is your most limited resource as your business grows, then it’s important to understand where and how your business is spending time so you can achieve your financial goals more effectively. 

Profit and Loss Statement

Your profit and loss statement, also known as an income statement, shows revenue, costs, and expenses over a period of time. It can be used as a means to show what your company has made or lost over a specific period, like a whole year, quarter, or month. More importantly, it is a great way to show where your business lost money and made a profit quarterly and annually. 

A profit loss statement is particularly important to you as a business owner because it shows you how sustainable and profitable your business is as well as whether or not you can pay yourself. Having a profit means that your business is earning more than it spends. Having a loss means that your business is spending more than it’s earning. The profit and loss statement is typically broken down into four categories including:

  • Income
  • Net Income
  • Cost of Goods Sold
  • Expenses

If you closely examine your business’s profit and loss statement, it can show you how your operational expenses are impacting profits, where you’re generating the most money, where you lose the most money and how you can reduce spending. When I’m looking at the financial health of a business, this is the report I start with first. 

For business owners who want to scale, understanding the profitability of your business throughout the year can be insightful into when to do certain things in your business, like more actively market, hire additional staff, or make other big financial decisions.

Cash Flow Statement

Cash flow is another important financial reporting tool that you can use to help your businesses overall success. Some people confuse cash flow with profit, however, cash flow is simply the money flowing in and out of your business. You can use a cash flow statement to determine if you have enough money coming in to cover operating expenses and other business expenses. 

The key factors that make up a cash flow report are: 

  • Cash flow from operations
  • Cash flow from investing
  • Cash flow from financing 

Depending on how complex your small business finances are, cash flow can be simple or complicated to manage. When you view your cash flow statement, you are looking at the amount of money coming in versus the amount going out, not how profitable your business is. While your business can have both positive and negative cash flow, a cash flow statement really tells you whether or not you can pay bills when they come up or if you’re going to struggle. 

Getting a handle on your cash flow report can help you better anticipate operational expenses and avoid tricky situations with your small business finances, even if your business is profitable. A cash flow projection is another helpful tool to check on the financial health of your business in the future if you’re struggling with cash flow issues. 

Using Financial Reports to Make Better Business Decisions 

Understanding how all of your financial reports impact your business can be overwhelming, especially when you’re busy building a successful business. Setting up these reports for your business is only the first step for getting a solid understanding of your business financials. 

Having financial reports is beneficial to your business, however, it doesn’t do you any good if you don’t know how to use them. Understanding how to use your reports is essential to your overall business success. There are many more reports you can set up, like chart of accounts, but these are the three most common to start with.

Learning small business finance doesn’t have to be impossible or make your eyes glaze over. As a business financial consultant, I teach small business owners the essentials of small business finances to help them get on the right path to financial success for their small business. 

Learn more about Not Rocket Finance to finally get a handle on small business financials and turn numbers into meaningful insights for your business success.

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