There are some integral components to successfully managing and growing any small business. Your business finances should at the top of that list. Whether that is building and understanding your financial statements or working with your small business CPA to manage those financial aspects of your business.

Our team of small business CPAs puts their heads together to cover some of the top financials that our clients need support to build or manage. In this blog, we will cover the top areas like balance sheets, the different methods of accounting, small business financial statements and more.

Four Basic Types of Financial Statements

Whether your business has been up and running for years or you are just starting, accounting for revenue and expenses can help keep your business running smoothly. It is important to make sure you maintain proper bookkeeping and have a basic knowledge of business finances.

The Balance Sheet

One of the most important components for managing your finances is your balance sheet. In case you are wondering what a balance sheet is, it is one of the most important financial documents every business owner needs to understand. Your balance sheet helps you understand the relationship between your income and your expenses, so you can maintain your business’ profitability.

A basic understanding of accounting sets a successful business apart from those that struggle. Fortunately, many places and people are willing to help you learn, including your accountant or your bookkeeper (if you employ one and don’t do the books yourself).

The Income Statement

The second type of financial reporting is the income statement, which shows net income or a net loss. This type of statement tracks all of the money coming in and all the money going out. Money paid out is called expenses, and money coming in is called revenue. When the expenses exceed the revenue, the income statement will show a net loss. The income statement is broken down into categories, including:

• Sales

• Operating expenses

• Non-operating expenses

Operating expenses include things like advertising and rent for office space. Non-operating expenses can include a one-time purchase and interest on borrowed money. Sales encompass the cost of all goods sold.

Your Cash Flow Statement

The third major financial statement is the statement of cash flow. This business financial statement is focused on showing you where all of your cash went. The components of financial reporting can get a little complicated on this one, so it may be hard to understand without some accounting education. The number of categories on this statement will be different for each business and depends on the size of the company. For larger companies, the categories include:

• Operating activities

• Investing activities

• Financing activities

For smaller companies, there are only two categories: cash inflows and cash outflows. The basic principle of a cash flow statement is to know and understand exactly where cash is flowing in from and where it is flowing out to. Your cash flow statement enables the company to see if they are spending more than they are earning or vice versa. If the amount of cash is consistently more than the net income, it means the company’s net earnings are “high-quality.” If the opposite is true, then it creates an opportunity to make some changes.

The Statement of Owner’s Equity or Shareholders’ Equity

This one is a bit less common for small businesses, yet it is still one of the top financial statements your business should have. If there are any changes in the owner’s equity between accounting periods, they are listed on the statement of owner’s equity. The key components listed on this statement include:

• Beginning equity balance

• Additions and subtractions

• Ending balance 

The additions and subtractions are for a particular period and can include things like net income, dividend payments, and withdrawals. This statement in particular is one that most companies will leverage accounting firms to help build especially when the business is profitable and appealing for potential investors.

Business Accounting Methods

According to the US Small Business Administration, businesses often use either the accrual or cash methods of recording purchases. The accrual method puts transactions on the books immediately upon completing the sale. The cash method only records this once payment has been received.

For example, if you make a sale in January and receive the $200 payment in February, an accrual method would allow you to record that on January’s books, while the cash method would require that payment to land on February’s books. Below is a chart from US SBA showing some of each accounting method's high-level pros and cons.

Accrual Accounting Method

Pros:

• Creates immediate snapshot

• Can reduce tax burden

Cons:

• More complex to manage

• Potentially deceiving figures

Cash Accounting Method

Pros:

• Shows cash flow clearly

• Easier to understand

Cons:

• Limits predictive value

• Less long-term clarity

Where to Get Accounting & Finance Support

If you are like most small businesses, finance and accounting are not where your experience and passion reside. You are focused on the sales component or the solutions your company provides to your clients. Those aspects often take the driver’s seat and the financial components are something you get around to. With that in mind, it might be in your business's best interest to get help with your accounting. Consider outsourcing with a certified public accountant (CPA) or at the minimum a bookkeeper.

A CPA will normally offer more robust and tailored services for your specific business needs. A bookkeeper can provide basic day-to-day functions at a lower cost, but won’t possess the formal accounting education of a CPA. They also won’t be experienced enough to provide the business strategy and process improvement expertise that a CPA can.

Some of the top areas a CPA and to some extent a bookkeeper will be able to manage for your small business include:

• Accounts receivable

• Accounts payable

• Available cash

• Bank reconciliation

• Payroll 

If you are looking for that specialized accounting support and financial understanding for your business, the team at JLP CPAs is here to provide that accounting expertise your business needs to position your business for profitable successful growth. Contact our small business accounting team today to get your financials working for you to position your business for growth!