5 IMPORTANT ACCOUNTING REPORTS FOR SMALL BUSINESS

We previously established that accounting involves deciding how money is and will be used for transactions and organizing/presenting that information in a way that is useful for decision-making. When we say ‘presentation’ we mean preparing reports. There are so many reports that companies need—income, financial position, cash flow, equity, receivables and payables, inventory etc. But as small business owners we will focus on 5 important reports. These will present all that bookkeeping entries on expenses and sales and purchases in a simple format so that you can tell how your money was used and what to expect in future.

We have:

·        Income statement/Profit or Loss account

·        Statement of Financial Position (SOFP)/Balance sheet

·        Accounts receivables report

·        Accounts payables report

·        Revenue by customer report

INCOME STATEMENT

This is the most important report for any business. Like the name implies it reports your profit or losses at the end of a period (usually one year). It tells you how much money the business makes, how the money was spent and a lot more. For example your Income statement can show you how much money you made from multiple income streams, as well as what expenses you spent the most on. Using this report you’ll get a proper view of costs that need to be managed, revenue streams not performing well and make critical decisions.

As you'll see the expense portion of the Income Statement carries a total of expenses you incurred over time for your business. Most of these are fixed costs i.e you'll always pay them e.g. rent, salaries. Others may vary during a period like vehicle expense (imagine how much you spend fixing your car), entertainment (feeding), telephone (call credits) etc.

Personally I'd say this report is the most important. You also don't need a professional to see that perhaps you spend too much on telephone or maybe on fixing your vehicle.

You can run trend reports using your Income statement. That means, a prior year's report can be compared with the report of a current year and you'll see where expenses vary and why they varied. If you increased expenses without a proportional increase in Revenue (sales), why’s that? Is there inflation? Did costs increase? Did you spend money you probably shouldn't have?

It can throw so much to light and force you to ask difficult questions and make adjustments where necessary.

Here's a sample income statement below.

SOFP or BALANCE SHEET

This report presents a snapshot of the financial position of a company. It shows what a business owns and owes at given time. It will include

·        assets—what you have (cash/bank, physical properties and intangible ones, receivables—money owed by customers, investments etc),

·        liabilities—what you owe (loans, payables—money you owe etc)

·        equity (capital, profit retained).

The accounting equation is based on this. The assets less liabilities equals equity. In layman terms, the difference between what you have and what you owe should be a positive number that grows over time. There’s so much to learn from this report, but what you need to do as business owners is to keep a record.

As you can see from the sample report, the balance sheet actually balanced. There's $101,000 on the Total Assets portion and same amount on the liability/equity corner.

Breaking it down:

Assets belong to your business. Like cash, money you're owed (account receivable), investments, prepayments (advance payments you made). Assets help you run the business and generate more money. You need stuff like this.

How do you know something is an asset?

It has to be for the company. If you buy a car in your name, it doesn't belong to the company. It has to be in the company's name.

Did you pay for it?

Will there be benefits from this thing in the future?

If these conditions are not satisfied, then it's not an asset.

Liabilities are things you owe other people. Avoid them for now. You're too small to start owing people. Things like Loans, trade payable (purchases you haven't paid for), taxes you owe, salaries you owe. People who supplied you food or stuff that you haven't paid for yet. The money isn't yours and you need to set apart money for them.

Equity is capital you used in starting the business and profits you made in prior years that are reinvested. This is simple. If that figure reduces to the point where it eventually turns from a positive number to a negative number, the life of your business is in peril. It has to keep growing. That means you need to make profits (remember your Income Statement). You need assets. You need to reduce liabilities.

ACCOUNTS RECEIVABLE REPORT

Unless your business is a charity, you want to get paid for goods sold and services rendered. Doing the work and sending the invoice (remember VAT) is part of the battle. You also want to make sure that money is paid and received. This report tells you how well you’re doing on this front. If your receivable collection day is 30 days, how long does it take your customers to pay up? Remember this is based on the assumption that you sell on credit. For most businesses sales are done on cash only, but this is true in part for businesses with physical products. For service companies, payment rarely works like this. The more money you have in the hands of non-paying customers, the less cash you have to run your company. Keeping this report gives you an understanding of chronic defaulters whom you need to tackle.

There is no standard sample that won't make you feel like giving up, so I'll tell you what should be included in your record.

Customer's name

Date of purchase

Date to pay up (if you have payment deadlines)

Date paid

Number of days of default

We call this a A/R aging report.

If you have a software like QuickBooks etc (see previous article) it will automatically report this for you.

REVENUE BY CUSTOMER REPORT

You should also look into customers who gives you the most money. Most service companies and freelancers thrive on repeat customers. This report tells you how much you made from each customer over a period of time. It’s a good way to know whom you’re giving a Christmas package of appreciation. You should aim at building solid relationships with quality clients as this can turn into a lucrative income stream. However, beware of putting too much faith on one income source. There is a risk involved in receiving a major chunk of your revenue from one customer. If they leave, your liquidity is threatened. Once you have your report work on diversifying if you’re operating at a risk.

ACCOUNTS PAYABLE REPORT

Just as much as you want to get paid, also endeavour to pay your suppliers. The A/P report tells you who you owe and how much. Some vendors have maximum days for payment, you should also take note of that and clear all debts before their due dates. Paying late can sour relationship and you need good partnership to succeed.

Again, the content of your report is similar to the A/R report.

Name of supplier.

Date of purchase or service.

Due data for payment (if any)

Date paid.

Number of default days.

You'll see that most of what you've been given simply requires you to keep record of the components of the larger report (like the Income statement and the Balance sheet).

Should you choose to get an accountant (and you should, even part-time), they'll be able to piece the record together.

What you should do:

Maintain expense and income record

Receivable record

Payable record

If you took a loan, state the date it was obtained, maturity date, principal amount, amount paid/unpaid, and balance.

Microsoft excel has become so good now that they give you templates for most reports. You'll see options so choose one that fits what you want to do.

This is part 4 of the 5-parts series on "Small Business Accounting 101".

Part 1: Setting up an accounting system

Part 2: 7 accounting checklist for small business

Part 3: Managing costs for your small business