August 13, 2022

The benefits of having accurate financial reports for your small business

According to the UN organization, each year, a special day (June 27e) is reserved to celebrate micro, small and medium-sized enterprises to highlight their enormous contributions (MSMEs) to the achievement of the United Nations Sustainable Development Goals (SDGs) as well as their tremendous ability to improve the world.

SMEs are considered the backbone of global society and running a small business can be complex. Accurate financial reports are essential for managing, organizing and understanding small business finances.

One of the most common mistakes made by small business owners and a leading cause of small business failure is failure to keep proper financial records. The success of a business is greatly influenced by the information disclosed by a good financial report.

In this article, financial reporting will be covered from the bottom up, including its definition, the financial information it generally covers, and the benefits.

What is financial information?

A financial report is a statement that discloses a company’s financial information and performance over a period of time, such as quarterly, half-yearly or annually. It helps you understand your financial situation, including how much money you have, where it came from, and where it needs to go. The financial report is like a medical report that gives you insight into the financial health of your business.

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To accurately describe a company’s financial condition, financial reports must adhere to accepted accounting principles, such as:

  • Revenue
  • Expenses
  • profit or loss
  • Capital
  • Cash
  • Assets and liabilities (third party debtor in the company)

There are three key financial statements you need to be aware of as a small business owner. These financial statements can be found in the financial report. These are the income statement, the balance sheet (statement of financial position) and the cash flow statement.

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  • Income statement: A company’s revenues, costs and profits are summarized in an income statement, sometimes called an income statement. The income statement effectively calculates a company’s net profit (income minus cost) by displaying how much the company has earned or lost in a specific period.
  • Balance Sheet: A balance sheet gives a picture of a company’s assets, liabilities and equity/capital at a given time. This statement helps to show the financial situation of the company where the assets are equal to the liabilities plus the shares.

ASSETS = LIABILITIES + EQUITY

Assets: Anything of value owned by your business, including machinery, real estate, structures, and intellectual property, is considered an asset. Examples: Cash, Accounts Receivable, Equipment and Inventory

Liabilities: Liabilities include all outstanding obligations, including bank loans, mortgages, unpaid accounts and other amounts due to third parties.

Equity: Equity is the amount of capital invested or owned by the owner of a business.

  • Cash Flow Statement: It shows the movement of money in and out of a business. It helps business owners understand how much money a business is making and spending.

Benefits of Financial Reporting

A representation of the actual financial situation of a business is necessary for any business or corporation. The importance of a company’s financial statements is best understood when the company is trying to attract new investors. Financial reports are required for many purposes and according to generally accepted accounting principles, in addition to being essential for management and investors to assess the financial strength of a business. Here are the main benefits of financial reports for small businesses:

1. Better decision making

Financial reports allow business owners to see trends and potential issues, and closely monitor their cash flow in real time. Keeping track of your financial statements will provide you with the framework to make quick and sound financial decisions when needed. You won’t be able to make critical decisions, the majority of which will likely impact the way you do business, objectively if your financial reports aren’t accurate.

2. Industry Compliance

An accurate financial report ensures that your business complies with the law and regulations required by government agencies. Government agencies ensure that the company complies with all laws, regulations and ethical standards. What if the numbers in your financial accounts don’t match or seem wrong? You could be penalized, which would affect your business. Therefore, an accurate financial report will save you from all that stress.

3. Trust and financial transparency

Small businesses have been selected and estimated to grow organically which will give a good financial reporting system to the business. It takes more than an income statement or balance sheet to show the performance of a business. Many businesses have been built on creative accounting, thereby masking their losses. Before making a formal investment, external stakeholders should investigate the financial health of the organization. Building trust with potential investors and creditors through financial reporting is a fantastic approach to demonstrating a company’s financial transparency. Accurate financial reports help build trust between investors, clients, customers, suppliers, lenders and other users of financial information.

4. Debt management

A company’s ability to control its debt depends on its financial information. Financial statements provide you with information about the history and present of your business so that you can make future plans.

5. Financial planning

Business owners can use a financial report to review past expenses and make changes for the future as well as prepare for urgent expenses. Without the need for emergency credit or loans, you can budget for future financial demands like emergencies and growth if you keep accurate financial records.

6. Loan requirement

Nothing is ever assured when it comes to your business finances. You may need to seek help from funding sources if your cash flow is not as consistent as you would like. These funding sources would ask your financials to check if the business is strong enough to repay the loan. Therefore, it is imperative that you maintain accurate and up-to-date financial reports.

In conclusion, one of the most important parts of every business is its financial reporting. When a company has significant achievements or unforeseen setbacks, it is easier to illustrate the importance of its financial statements.

As a small business owner, with your finances well organized i.e. there should be a system that is in place in your business environment to ensure an accurate financial reporting system, this will help your company to grow and in return gives a good view to the stakeholders.


The article was written by Oluwadahunsi Adeyinka