Pulling monthly financial reports is essential for a small business to succeed. Without them, it’s like a ship sailing with no map. The U.S. Small Business Administration recommends managing your financials with these reports as a regular practice. But it’s easy to get bogged down in excess or overwhelmed by unusual language, so what are the most important financial reports for a small business? We’ve outlined the top four reports that an owner should ideally be pulling every single month.
These essential financial reports for small businesses provide valuable insights into your company’s health, help you make informed decisions, and keep you prepared for tax season,
Understanding Accrual vs. Cash Basis Accounting
Before diving into the best financial reports for small businesses, it’s essential to understand the two primary accounting methods: accrual and cash basis.
- Accrual: Revenue and expenses are recorded when they are earned or incurred, not when cash actually changes hands. This method provides a more accurate picture of long-term financial health.
- Cash Basis: Revenue and expenses are recorded only when cash is received or paid. This method is simpler but may not provide a complete view of your financial standing.
The difference is key because pulling the correct reports can illuminate issues with outstanding invoices or unpaid vendors. Many small businesses start with cash basis accounting for simplicity but may switch to accrual as they grow.
The Four Essential Small Business Financial Reports
We recommend pulling the following every month or every quarter to stay informed about your finances:
1. Balance Sheet
The balance sheet is a snapshot of your business’s financial position at a specific point in time. It outlines your assets (what you own), liabilities (what you owe), and equity (the difference between assets and liabilities).
Why it’s essential: This report helps you evaluate your company’s financial stability and informs lending and investment decisions.
2. Profit & Loss (P&L)
Also known as the income statement, the P&L report shows your revenue, expenses, and net profit over a specific period. If a business owner really wants to see whether or not their business is exceeding their expenses, they will need accurate bookkeeping/recording of that information and to regularly check their P&L. In short, it tells you whether your business is making or losing money.
Why it’s essential: It highlights your business’s profitability and identifies areas where you can cut costs or increase revenue.
3. Cash Flow Statement
The cash flow statement tracks the actual movement of cash in and out of your business over a specific period. It categorizes cash flow into operating, investing, and financing activities. It will let you know whether your business has enough cash to cover expenses and invest in growth.
Why it’s essential: Positive cash flow is critical for day-to-day operations and long-term sustainability.
4. Accounts Receivable/Accounts Payable
These reports show the money customers owe you (accounts receivable) and what you owe to vendors or suppliers (accounts payable). If your small business deals mostly with invoices that are not paid immediately, the AR report can help to see how much is still outstanding, for example.
Why it’s essential: Managing these reports helps maintain healthy cash flow and avoid late payment penalties.
Regularly reviewing these small business financial reports ensures you’re informed about your company’s financial health. Whether you’re using cash or accrual accounting, these essential reports empower you to make strategic decisions, plan for growth, and address financial challenges proactively.
