No matter what type of business you operate, you would like to make predictions about your business’ future, diagnose your business’ financial health, and get the tax breaks your enterprising efforts deserve.
Every successful business has a backbone of accurate and up-to-date accounting records, so we’re here to share how you can use your financial report to power up your business.
Why is business accounting important?
When your books are in order, you know where your income comes in - and where it goes out.
Then you can focus your business activities toward your most profitable products or services and reduce unnecessary spending. This valuable information equips you to make decisions to grow your business.
It’s easier to gauge the overall health of your business when you can see the big picture.
Say you run a retail shop and you introduced some novelty items six months ago. Have your profits risen in the past two quarters? Your accurate books can show whether this profit is the result of more customers buying some specific items, or if you simply had more customers overall. If it’s the former, you might benefit from revamping your merchandise list to get more similar products. If it’s the latter, perhaps you want to revisit a particularly successful promotion campaign. In this way, bookkeeping makes these types of business decisions less of a gamble.
Keeping detailed financial records is also helpful for securing the best financing.
It reflects well on you as a business owner when you know exactly what your business’ current financial situation is, and its potential for future success. Even if your business didn’t make much money in the early years, if you have the records to show that your company is profitable overall and continues to do so, you can give investors or lenders the confidence they need to support you.
Last but not least, everybody hopes for a big tax refund come springtime.
But sometimes how to get there is not clear. As a business owner, keeping track of every bit of money that came through your business during the year can open up opportunities for tax deductions and incentives that you may not have considered.
There are a wide variety of categories that can potentially be claimed as business expenses, including, but not limited to:
Insurance
Licenses & taxes
Meals costs
Accounting fees
Travel
Supplies
It can be difficult to remember all of these items offhand, but if you keep detailed books, at the end of the year you have a record of every item that you spent money on, and you can then check that record against the list of deductible business expenses and know exactly what amounts you can and can’t claim.
Bookkeeping over the course of a few years also makes it easier to estimate how much tax you’ll owe. If your profits and losses remain somewhat stable over a few years, you can get an idea of how much you’ll need to set aside each year for taxes, especially when a business owner is required to pay taxes quarterly, not a lump sum at the end of the year.
What should be in a Financial Report?
A detailed financial report includes three elements:
1. Balance sheet -
This describes the overall value of your company, taking three main factors into account:
The value of your assets (your cash and property)
The value of your debts and liabilities
The value of your equity (however much money you’ve invested into your company)
2. Income statement
It’s exactly what it sounds like: It’s a record of all your income. An income statement shows your gross receipts and subtracts all the money you spent, to give you a net income over a given time period. An income statement needs to be detailed; it should include every single dollar and cent that you made or spent over the chosen time period. If this total is in the negative, it is even critical to understand why you spent more than you made.
3. Cash flow statement
This is very similar to an income statement. The difference is that a cash flow statement only shows cash transactions — basically, all of your business expenses and sales. It doesn’t include things like interest accruals from investments, which might not show up immediately in your business-transaction records.
In combination, a balance sheet, income statement, and cash flow statement provide an accurate picture of not only how much money your business is making and spending, but exactly where that money is coming from and going.
As a business owner, you’ll most likely have to create a complete financial report at least once a year, for tax purposes. However, there are plenty of reasons to make quarterly, or monthly financial statements as well. Frequent financial reports are a great way to check on your budget, and figure out where you can make adjustments if necessary.
How do I get started on my Financial Report ?
Gather the Data
Make sure you’re keeping the following:
Receipts
Invoices
Payroll records
Bank and credit card statements
Investment statements
Tax returns
Don’t just keep them jumbled in a shoebox. Take the time to organize your records, whether that means using a dedicated filing cabinet or breaking out the label maker. Saving your records in the cloud also ensures that they’re easily accessible in a digital format from any device. Your well-organized records can save you a big headache if you’re ever subjected to an audit.
Find a System That Works
In the beginning, you might use a pen-and-paper ledger, or programs like Microsoft Excel or Word to record income, expenses, interest, and any of the other cash flow items that appear in a financial report. The manual method can work if you prefer a hands-on approach, but it can also be time consuming, and it leaves more room for human error.
Automatic or online bookkeeping, on the other hand, uses software that takes care of most of the calculations and data entry for you. A program like Quickbooks Online, a cloud accounting software, can help you track income and expenses much faster than you could with a traditional ledger.
Another benefit of a cloud accounting software is the ability to link to other financial programs that your business uses, such as online banking or mobile payment application. With all your software linked through the cloud, payments that you make and receive can be automatically recorded to the accounting software.
The software program can then make the calculations for you, giving you an accurate picture of your total income and spending that’s updated every time your money moves, even letting you check your records on your laptop or smartphone even when you’re out of the office.
Our Business Bookkeeping Checklist
Follow these steps to get started with your business’ bookkeeping:
Save and organize all your records and receipts
Determine which accounting method, e.g. cash or accrual, works best for you
Download quality cloud accounting software that your CPA recommends
Practice creating a detailed financial report - it doesn’t have to be perfect first time.
Hire a professional bookkeeper and accountant to show you the ropes
Want some help getting started? Contact us!