Following a recent quarter end, Oracle reported(opens in new tab) its total quarterly revenues were up 11% year-over-year, with international sales accounting for 60% of its revenue

Every quarter, anyone who’s interested can get a glimpse into the financial health of a company like Apple because it is publicly traded and required to disclose its financial performance. It communicates these results in earnings calls and by filing financial reports with the Securities and Exchange Commission (SEC).

Yet financial reporting is a vital exercise for businesses of all sizes.

What Is Financial Reporting?

Financial reports help both internal leaders and external stakeholders understand the financial state of the business. Although small, private companies are only required to file reports with the SEC if they have $10 million or more in assets and 500 or more shareholders, most businesses create these statements, even if they’re only for internal consumption. Additionally, many small, private businesses will at some point need to provide financial reports to stakeholders when seeking loans from a bank, investment from a venture capital firm or equity funding.

Why Is Financial Reporting Important?

In the Federal Reserve Banks Small Business Credit Survey(opens in new tab), 43% of the 5,514 small businesses surveyed said they had applied for financing in the past 12 months. They most commonly used those funds to expand the business, acquire new assets or pursue a business opportunity or to pay operating expenses. The most common types of external financing small businesses looked to were loans/lines of credit, a credit card, trade credit, leasing or an equity investment. To secure that financing, the majority went to a bank, with an online lender being the second-most popular option.

To receive any funding, whether from a bank, venture capital investor or another source, stakeholders will need to review financial reports. Small businesses may also need to submit financial statements for tax purposes. For instance, C Corporations are required to complete a balance sheet as part of their annual federal tax return. The U.S. Small Business Administration (SBA) says the IRS wants to see that the balance sheet included with Form 1120(opens in new tab) aligns with the company's books and records.

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What Is Included in Financial Reporting?

For small businesses, financial reporting always includes the balance sheet, income statement (also called the profit and loss statement) and the cash flow statement. Small businesses may also put out an annual report that includes financial statements and more detailed information about their year, including key business goals and achievements and information on leadership.

Video: Financial Reporting Explained

The 3 Most Important Financial Reports for Small Businesses

  1. Balance Sheet

    The SBA says any company applying for an SBA 7(a) loan for more than $350,000 needs to include a include a balance sheet. If the company is for sale, investors and potential buyers will also review the balance sheet to evaluate its financial position.

    The balance sheet provides a snapshot of the business’ overall health—put simply, what it owns, what it owes and shareholder equity. Balance sheets should be prepared according to the company's defined reporting period (every quarter, for instance).

    Assets are listed first on the balance sheet, followed by liabilities and shareholder equity. The SEC says assets are listed in descending order of how quickly they can be converted into cash, with accounts receivable and inventory near the top of the list. Fixed assets, like trucks, office furniture and other property, would be listed below current assets like inventory. Liabilities follow the same rule. An example of current liabilities is accounts payable. Shareholders’ equity may be listed under liabilities, but it’s a separate category, not a liability.

    Banks and investors may look to a balance sheet to determine a company’s debt ratio. Debt ratio is the total debt divided by total assets, then multiplied by 100. For instance, if the business has $100,000 in debt and $500,000 in assets, the debt ratio is 20%. The higher that percentage, the more the company is leveraged.

    Calculating the items listed on the balance sheet can be completed using the sample form from the SBA below.

    This automated form is made available compliments of CCH Business Owner’s Toolkit

    [Your Business Name]
    Balance Sheet
    [Mmmm Dd, 200X]

    Current Assets:
    Cash   $0  
    Accounts Receivable $0    
    Less: Reserve for Bad Debts 0 0  
    Merchandise Inventory 0  
    Prepaid Expenses 0  
    Notes Receivable 0  
    Total Current Assets   $0
    Fixed Assets:    
    Vehicles 0  
    Less: Accumulated Depreciation 0 0  
    Furniture and Fixtures 0  
    Less: Accumulated Depreciation 0 0  
    Equipment 0  
    Less: Accumulated Depreciation 0 0  
    Buildings 0  
    Less: Accumulated Depreciation 0 0  
    Land   0  
    Total Fixed Assets   0
    Other Assets:    
    Goodwill   0  
    Total Other Asset   0
    Total Assets   $0
    Liabilities and Capital
    Current Liabilities:    
    Accounts Payable   $0  
    Sales Taxes Payable   0  
    Payroll Taxes Payable   0  
    Accrued Wages Payable   0  
    Unearned Revenues   0  
    Short-Term Notes Payable   0  
    Short-Term Bank Loan Payable   0  
    Total Current Liabilities     $0
    Long-Term Liabilities:    
    Long-Term Notes Payable   0  
    Mortgage Payable   0  
    Total Long-Term Liabilities   0
    Total Liabilities   0
    Owner’s Equity   0  
    Net Profit   0  
    Total Capital   0
    Total Liabilities and Capital   $0
  1. Income Statement (Profit & Loss Statement)

    The income statement provides a detailed breakdown of the company’s revenue, its cost of revenue, operating and non-operating expenses and non-operating income to show a lender or investor the company’s profit or loss over a given reporting period.

    The SEC offers a helpful metaphor for conceptualizing a multi-step income statement—think of it as a set of stairs. The business starts at the top with all of the money it made over that reporting period and continues to go down the stairs, subtracting costs and expenses until arriving at the bottom line.

    Multi-step income statements begin with the company’s gross sales for a specific period. The next step is to subtract the value of returns, discounts and allowances. This is the company’s net sales. From net sales, deduct the cost of sales or cost of goods sold (COGS), which includes all of the costs associated with making or distributing products, for manufacturers. For wholesalers and retailers, COGS is the price paid to acquire inventory for resale, including inbound shipping fees. This is the gross profit, because operating and non-operating expenses haven't been deducted yet.

    Subtract operating expenses from gross profit to get the operating profit. Any interest, non-operating income or non-operating expenses are then added or subtracted from the operating profit to arrive at operating profit before income tax. Once income tax is deducted, the company can see its net profit or loss.

    The SBA offers this useful template for businesses to help them create an income statement.

    This automated form is made available compliments of CCH Business Owner’s Toolkit

    [Your Company Name]
    Income Statement
    For the Year Ended [Mmmm Dd, 200X]

    Gross Sales   $0.00
    Less: Sales Returns and Allowances $0.00
    Net Sales   $0.00
    Cost of Goods Sold:
    Beginning Inventory $0.00
    Add: Purchases $0.00
    Add: Freight-in $0.00
    Add: Direct Labo $0.00
    Add: Indirect Expenses $0.00
    Less: Ending Inventory $0.00
    Cost of Goods Sold   $0.00
    Gross Profit (Loss)   $0.00
    Advertising $0.00
    Amortization $0.00
    Bad Debts $0.00
    Bank Charges $0.00
    Charitable Contributions $0.00
    Commissions $0.00
    Contract Labor $0.00
    Credit Card Fees $0.00
    Delivery Expenses $0.00
    Depreciation $0.00
    Dues and Subscriptions $0.00
    Insurance $0.00
    Interest $0.00
    Maintenance $0.00
    Miscellaneous $0.00
    Office Expenses $0.00
    Operating Supplies $0.00
    Payroll Taxes $0.00
    Permits and Licenses $0.00
    Postage $0.00
    Professional Fees $0.00
    Property Taxes $0.00
    Rent $0.00
    Repairs $0.00
    Telephone $0.00
    Travel $0.00
    Utilities $0.00
    Vehicle Expenses $0.00
    Wages $0.00
    Total Expenses   $0.00
    Net Operating Income   $0.00
    Other Income:
    Gain (Loss) on Sale of Assets $0.00
    Interest Income $0.00
    Total Other Income   $0.00
    Net Income (Loss) $0.00

    A less complex business that uses cash basis accounting may use a single-step income statement. With a single-step statement, gross sales and non-operating income are included at the top to show the company’s total revenue. All operating expenses are then subtracted from that total revenue to calculate the net profit.

  1. Cash Flow Statement

    Cash flow has always been a challenge for small businesses, and the pandemic has only exacerbated that problem, as evidenced by the most recent weekly Small Business Pulse Survey(opens in new tab) by the U.S. Census Bureau. Only 28% reported they had enough cash on hand to operate for three months, and nearly 50% expected it would take more than six months for business to return to the level it was at a year ago.

    Tracking cash inflows and outflows and comparing those numbers month-over-month and quarter-over-quarter is important to maintain stable cash flow. The cash flow statement uses the numbers from the income statement and the balance sheet to make the cash position of the business clear, because it shows changes over time and the net increase or decrease for that particular accounting period.

    Cash flow statements divide and examine cash flow from three cash buckets—operating activities, investing activities and financing activities. The SBA also offers a sample cash flow statement template, seen below.

    This automated form is made available compliments of CCH Business Owner’s Toolkit

    Cash Flow Budget Worksheet
    [Month]  [Month]  [Month]  [Month]  [Month]  [Month]  Total
    Beginning Cash Balance $10 $10 $0 $0 $0  
    Cash Inflows (Income):  
    Accts. Rec. Collections 0
    Loan Proceeds 0
    Sales & Receipts 0
    Total Cash Inflows $0 $0 $0 $0 $0 $0 $0
    Available Cash Balance $0 $0 $0 $0 $0 $0
    Cash Outflows (Expenses):
    Advertising 0
    Bank Service Charges 0
    Credit Card Fees 0
    Delivery 0
    Health Insurance 0
    Insurance 0
    Interest 0
    Inventory Purchases 0
    Miscellaneous 0
    Office 0
    Payroll 0
    Payroll Taxes 0
    Professional Fees 0
    Rent or Lease 0
    Subscriptions & Dues 0
    Supplies 0
    Taxes & Licenses 0
    Utilities & Telephone 0
    Subtotal $0 $0 $0 $0 $0 $0 $0
    Other Cash Out Flows:
    Capital Purchases 0
    Loan Principal 0
    Owner’s Draw 0
    Subtotal $0 $0 $0 $0 $0 $0 $0
    Total Cash Outflows $0 $0 $0 $0 $0 $0 $0
    Ending Cash Balance $0 $0 $0 $0 $0 $0

Use Financial Management Software for Financial Reporting

In preparing for an IPO, one of the first steps companies must take is pulling data from their financial software. Companies must provide three years of audited financial data before they go public, and having an accounting system that automates many accounting processes and stores all key records in one place makes it much easier to provide accurate and timely financial reporting.

Financial reporting also improves financial discipline and ultimately puts small businesses in a better spot. A study by the Federal Reserve Banks of Chicago and San Francisco found a direct correlation between financial management and the financial health of small businesses. The study showed organizations with better financial planning and management practices had higher rates of excellent or above-average financial health and were far more likely to have annual revenue of at least $1 million.

Robert Half’s 2019 Accounting & Finance Functions report found that businesses of every size increased their accounting automation over the last year. Some 39% of firms with less than $499 million in revenue use automated software, with invoicing, financial report generation, data collection and document storage and compliance the most likely functions automated. And more than half of those surveyed that they use some or only cloud-based software for accounting and finance, such as ERP.