Most small businesses keep records for use when filing taxes only. However, understanding your business’s financial position is vital to making crucial business decisions. These decisions can include such moves as growth and expansion. Hence, the need to keep accounting records. The records help to generate critical reports essential to every business.
In addition, it’d be best to know your cash flow status to help your daily operations. Maintaining good accounting reports can help you have essential data to achieve this. This can help you understand how to prioritize your payouts depending on your receivables. Furthermore, a statement like the accounting balance sheet is vital when seeking credit facilities from loan institutions and suppliers.
These and other accounting reports play a critical role in your business’s financial decisions. The detailed information below can shed more light on these reports and how they affect your business.
The Balance Sheet
A balance sheet is a periodic statement that shows how financially healthy your business is at a particular time. This can be monthly, quarterly, or annually. Sometimes, other accounting professionals also call it a statement of financial position. A balance sheet summarizes your business’s assets and liabilities and reflects its financial stability.
Your total assets can be both tangible and intangible assets. For instance, your tangible ones can comprise fixed assets like equipment, machinery, and other property under your business’s ownership. Additional assets include your bank account balances. On the other hand, account receivables form part of your intangible assets. Your current sales are also included in your tangible assets.
Your liabilities include entries for business credits and loans. If you have account payables, these are also part of your liabilities. In addition, any accruals of salaries, wages, benefits, and other expenses you pay for your business also appear as liabilities. It’s essential to note that the equity you have as the owner is classified as liabilities. The reason is that the accounting principle classifies this as a long-term loan. Thus, it’s a debt the business owes.
If you want to inject more funds to grow your business, a balance sheet is one of the crucial financial reports the lenders will refer to. Furthermore, this financial statement guides you when making internal business decisions. It’s also a vital marker of your business’s net worth.
The Profit And Loss Or Income Statement
The profit and loss statement is a breakdown and analysis of your expenses and revenues over a particular period. The financial period can be monthly, quarterly, or annually. Thus, it helps reflect your financial performance during that period. This crucial accounting report shows whether your business is making profits or losses.
An income statement shows your expenses over a particular period. These can be administrative and operational costs you incur to run your business. In addition, the report carries other crucial costs such as those for goods sold. On the other hand, the profit and loss statement also shows your total revenue income during the period covered.
An income statement can be beneficial to your business in various ways. First, you can use it to determine your spending costs from one period to another. This comparison can help you find ways to protect your revenue and increase your profit margins. The statement also helps you know how your expenses affect your profit margins and the percentage changes from the previous period.
Additionally, the statement can be significantly instrumental in determining your financing needs. These needs can include taking up loans and other credit facilities. If your report generates a healthy profit margin after tax, you might not need to seek loans. However, this can change from one financial period to another. Thus, it’d be best to monitor this report regularly across different accounting periods.
Furthermore, a profit and loss statement can be instrumental during your budgeting process. It helps guide your budget reduction or increments. This is both on the revenue and expenses sides. Your income statement also lets you know your tax obligations to the relevant authorities. Thus, you can plan on how to meet these obligations timely.
Accounts Payable Aging
While running your business, you have several business partners you frequently deal with. You can enter into contractual agreements with these partners to supply goods and services to your business on credit and make payments after a particular period. This period can be 30, 60, or 90 days after the issuance of an invoice. Hence, it’d be best to honor these invoices before the agreed credit period elapses. The accounts payable aging report helps you meet your credit obligations to your suppliers on time. Thus, it helps build and maintain a good reputation with them.
Therefore, it’s essential to have a comprehensive record showing individual business partners and what you owe them. This is what the accounts payables (AP) do. This report also displays the due dates of each amount.
Additionally, the report is instrumental in managing your cash flows. The reason is that you get to know who to pay first. The statement also helps avoid potential penalties or interests for late payments. You can also use the report for your budgetary decisions.
Accounts Receivable Aging
While AP aging indicates what you owe your vendors, accounts receivable (AR) aging shows what you expect to receive from your customers. If you extend credit facilities to your clients, they won’t pay you immediately. After sending an invoice, you can expect their payment per the credit contract.
These credit facilities may or may not materialize. Thus, ensuring that the clients you extend credits to are creditworthy is essential. The reason is that if you accumulate bad debts, you can run into losses and close your business. Thus, the need to have a robust accounts receivable structure and an AR report plays a vital role in this.
You can structure your credit facilities depending on the client. Like the APs, you can have 30, 60, or 90-day credit facilities. The AR aging report ensures that you can identify due invoices and those within the contractual terms of credit. A typical AR report can indicate current, due, and past due-date invoices. This helps identify potential risk clients you may need to renegotiate their terms.
An AR aging report can also play a significant role when planning acquisitions and expansions. The AR and AP reports are crucial to understanding your current and future cash flow. Thus, they’re essential instruments for your business financial decisions. Sometimes, financial controllers prepare these documents into one cash flow statement.
Running a business can be challenging. Various decisions and plans can heavily rely on your financial situation. Thus, you can make inaccurate steps if you don’t have enough data. However, you can make better and more informed financial decisions with a balance sheet, an income statement, and a cash flow statement.