Entrepreneurs often devote much of their time & energy to day-to-day outward business operations, including customer service, marketing, sales, inventory management, while missing out completely on a critical component of their business- the financials.
Today, we will discover the five most essential financial documents that every business owner must create to track, drive business growth and determine the business’s overall health.
1. Balance Sheet:
A balance sheet is one of the most paramount forms of financial statements for any business. It contains information about a company’s assets, liabilities as well as shareholder’s equity. In other words, a balance sheet gives you a snapshot of what an organization owns and what it owes! Plus, it talks about the amount invested by its promoters and owners.
Stakeholders can understand a company’s position better and relate to its worth at a given time with the help of balance sheets. One can also look at the balance sheets in conjunction with other financial statements. Hence, we can understand an organization’s relationship with different accounts with added transparency. With a proper analysis of a balance sheet, one can understand a company’s liquidity, leverage & efficiency.
2. Quarterly Business Review:
For any entrepreneur or sales consultant, a QBR or Quarterly Business Review is a critical tool. This financial statement helps you bring immense value to the company by bridging the gap between the customers, the products sold, and your company. As the name suggests, a Quarterly Business Review occurs once per financial quarter where both vendors and customers sit together and discuss how the vendor supports the customer’s business.
It is critical for businesses of all scales to create and host winning QBRs for customer success. An effective Quarterly Business Review enables you to strengthen relationships with your customers, review organization-centric goals, identify & analyze challenges and discover new opportunities. QBR is different from other financial statements since it benefits both- the customer and the vendor.
3. AR Days VS AP Days:
Accounts Receivable (AR) and Accounts Payable (AP) go hand in hand and are a critical part of the cash flow management of businesses of all scales. To ensure a healthy business, one must stay on top of AR and AP. For an organization, the primary goal with accounts receivable and payable is to get paid at the earliest and delay the payments till possible.
An Accounts Receivable and Accounts Payable report allows you to unlock insights into your business’s cash flow. In simpler terms, you can ensure that ample funds are coming into the business to fund the expenditure, pay your bills, and have sufficient cash left over. While preparing the AR and AP report, you may consider using a quarterly planning template to gather valuable insights and provide a bird’s eye view of your cash holding and other finances to your stakeholders and executives.
4. Cash Flow Statement:
When it comes to measuring the cash position of a business, a cash flow statement comes into the picture. The financial report talks about a company’s inflow & outflow of cash and other equivalents. This aids businesses to discover the availability of cash across different segments, domains and do short & long-term planning.
The CFS or Cash Flow Statement also talks about how strong an organization manages its cash position or how effectively they generate cash. CFS accounts for cash flows from three major areas- investing activities, operating activities, and financing activities. Further, it complements a company’s income statement as well as the balance sheet.
5. Budget VS Actual Report:
Often small business owners undermine budgeting as a non-essential activity. Without a combination of effective budgeting, strategic financial planning, and a starting pivot, one can not really determine how far the company has come. The budget VS actual report tells a company whether their spending and generated revenue is meeting the financial forecasting projections or not.
You can consider using a budgeting and actual roadmap template and discover whether there are areas that require more funding, the prepared budget is realistic, or is the business on pace to fulfill long-term objectives? Businesses can also identify where they are overspending and reduce spending and improvise their future spending.
The End Line:
These five reports can help you become a financially-savvy business owner, discover the scope of opportunities, and leverage accordingly. If done right, one can unlock valuable inference about the finances of their business and learn how the money actually flows in and out.
Hence, it is only then you can prepare yourself for critical conversations with potential investors, stakeholders, lenders and lay a solid foundation for all arms of your business to grow.