Good bookkeeping is essential for any business, no matter the size. Accurate records guide decision-making and help business leaders grow their companies and increase their revenue. Healthy bookkeeping can also lead to good reporting. Producing timely and accurate financial statements reduces the need to pore over old records and invoices to find information later. When business leaders can easily understand the up-to-date conditions of their operations, they can more efficiently make the best decisions for the future.
As you organize your bookkeeping practices, get to know a few top reports that can guide your strategies and support the financial health of your business. Here are eight important financial statements you should become familiar with.
1. Income Statement
An income statement is also known as a profit and loss (P&L) report. It reports the amount of money the company made compared to how much it spent — within both sections broken down into various categories and sub-categories. This report tells business owners exactly how much revenue companies make and provides insight into major costs that could affect profitability.
2. Balance Sheet
The balance sheet reflects how much an organization is worth. It reports all of the assets within a company, which equals the shareholder equity (earnings) plus the liabilities that come with operating the organization. Liabilities can include expenses like rent, wages, and operating costs that are expressed in negative numbers. The balance sheet provides a snapshot of the company’s health and profitability.
3. Statement of Cash Flows
This report covers the amount of cash moving in and out of a company. While other reports might cover assets like land and equipment or highlight funds sitting in accounts, this document focuses on the amount of money coming in and the cash that leaves the organization each month. This provides a clear picture of direct operating costs and revenue.
4. Management Reports
Balance sheets and P&L reports are standard across various industries, but management reports are hyper-focused on your business. These reports look at your specific operations and track their profitability. They might review the gross margin of various products and services or look at the ROI for your marketing efforts. Business leaders use management reports to optimize their companies so they become more profitable.
5. Accounts Receivable
The accounts receivable reports reflect the amount of money that is owed to the company from clients who have not yet paid for their service. For example, a law firm will provide consulting services to a client and send them an invoice. Until the client pays the invoice, their records are part of the accounts receivable accounts. These accounts can be considered future income.
6. Work in Progress Reports
A work-in-process (WIP) report provides a financial snapshot of a project that has yet to be completed. These reports are often used in construction but they can be applied to other industries as well. For example, a law firm could report the number of hours spent on a specific case or client while tracking the estimated number of work hours that are still needed. This alerts managers to the profitability of the investment.
7. Budget Variance Reports
These reports compare the budgeted funds for a project compared to the amount actually spent. For example, if you budgeted $10,000 for a project but it required $12,000 to be completed, the variance would be $2,000.
Use these reports to make sure your company isn’t overspending or underspending. If you notice low profitability levels on your P&L, look at the variance to see where your company went over budget.
8. Individual and Group Collections Reporting
These documents are part of your accounts receivable reporting. They highlight the receipts owed to the company on a department or individual level. For certain businesses, such as law firms for example, this is especially important since each lawyer or legal team will manage their own clients. If the accounts receivable reports look incorrect or skewed, team leaders can look at these reports on an individual or group level to figure out why there are discrepancies.
Optimizing Your Business’s Financial Reporting
All of these financial statements are only useful if they are accurate. If there is missing or false information, your business won’t be able to make the best possible decisions to move forward. As you start developing these reports, build good bookkeeping habits to make sure they are accurate. Here are a few tips to get started.
Establish a Uniform Data Collection Process
Developing detailed and effective processes is the first step toward collecting accurate data. Develop a plan within your company to track expenses, manage income, and review your books. This could be as simple as keeping all financial records in the same folder and reviewing them weekly.
As you develop your data collection process, make sure it's scalable. A system that works for a two-person law firm might not be sustainable once you have a team of 20 people underneath you. The infrastructure you build today can support you in the future.
Bookkeeping doesn’t have to be time-consuming. The right software systems can help you quickly create invoices, pay bills, and balance your books. These tools are also designed to catch inconsistencies, allowing you to correct errors in your bookkeeping before you publish your financial statements.
Look for specific software solutions that are designed for your industry. For example, a law firm can invest in legal accounting software to manage clients and vendors. This way you won’t feel stuck with a bookkeeping tool that doesn’t understand the nature of your business.
Outsource Your Accounting and Bookkeeping Services
If you want to remove the burden of bookkeeping from your plate entirely, you can outsource your efforts to an expert service provider. These companies specialize in helping companies manage their books. They can catch errors, audit your accounts, and provide clear reports for you to review.
While accounting apps are supposed to be easy to use, many are becoming more complex to the point where they are difficult to keep up with. For many teams, it’s easier to hand this task off to another company that can take on the work instead.
As you search for a bookkeeping vendor, look for a partner who understands the needs of your industry. If you work in the legal industry, you can find an accounting service that works with law firms specifically — even one that supports teams with fewer than 300 employees. Unlike generic bookkeeping companies, a legal accounting firm will understand your state-bar regulations, compliance needs, and IOLTA tracking requirements. These firms can also offer advice on how you can increase leads and grow your revenue. They can give you a healthy accounting picture for the future.
Knowing how to read financial statements is essential for growing your business. Start by learning about these eight documents and then see how improved bookkeeping practices and outside services can help you grow your firm in the long run.