Why Is It Important For Small Business Managers to Analyse Their Financial Reports?

 

Small businesses have been booming and coming up pretty rapidly over the past couple of years. With the advancement of technology and the borderless world of information, it has become so much easier to set up a small business and thrive from it. So what exactly does a small business mean? It might seem simple, but there are a few definitions out there. A small business today might mean a solo entrepreneur or a multi-million dollar e-commerce business!

What Exactly Constitutes “Small” in a Small Business?

The size definition of a business usually comes from the money you make annually or the number of employees you have. In some cases, this might include both.

Some examples include countries like :

A) United Kingdom

According to UK’s Companies Act 2006, a small company is a company that :

  • has an annual revenue of no more than 6.5 million pounds.
  • has a balance sheet total of no more than 3.26 million pounds.
  • also has no more than 50 employees.

In the UK, the company would need to meet all 3 standards to qualify as “small”.

 

B) United States of America

In the US, things are a bit more complicated as they use revenue and/or the number of employees to define a small business. Each industry then has their own standard which results in a huge amount of standards for a small business. You can find out more information about that here.

 

Then, What Are Financial Reports? 

Financial reports are basically financial statements that will be able to provide an overview as to how the business is running. It also allows for business owners to analyse if the company is profitable or not.

Most financial statements can and will include things like cash flow, the profit and loss sheet, business income and also business expenditure. If you own or manage a small business, it is essential for you to keep a very close eye on financial reports and we will now analyse why you should.

 

Reason 1 : Financial Decisions

Financial reports are there for you to be able to make more informed decisions when it comes to the health of your business. You can depend on the numbers in the reports to help you paint a much better picture of certain parts of the company. These moving parts cost money and with a proper report, you can tell which parts are better than the others. With more frequent reports you can pin point the problems and the wins that will aid in better financial decisions.

 

Reason 2 : A Look At The Cash Flow

The cash flow statement will be able to indicate where your cash enters and exits the business. This particular flow is very important. The flow allows for you to check and monitor where your money is going. It shows you what you might be spending too much money at and where you should be saving. It also shows you where you are making money from too! So if you have multiple business verticals, you can see which one is making the most money. With that information you can improve verticals that make the most money and cut down or improve the verticals that are not making you enough money.

 

Reason 3 : Accuracy Across All Departments

Most finance departments have a unified fear when it comes to auditing season. Audit season will usually happen in the middle of the year because it allows the company to tally all their numbers while still running a successful business at the same time. By having a constant financial reporting system that is looked at and analysed by small business owners, you will be sure that the numbers are accurate all the time. Having eyes on it more often will only allow for it to be more accurate and up to date for the government and tax departments.

 

Reason 4 : Accountability and Responsibility

When the management constantly analyses the company’s financial statements, you will be able to encourage and show the rest of the company that you are taking things seriously. You are also able to check on the health of the company’s finances to make sure that there is no embezzlement or some weird cash flow problems happening.

 

Ensuring that you know what’s happening with your company’s finances is extremely important. If you ever need help ensuring that your financial statements are in order you might need to employ someone to check on that every once in a while.

 

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