The importance of financial reporting for small business owners

We explain the three key financial statements and how you can use them to spot trends, improve cash flow and manage debt

All UK companies, from corner shops to corporations, must submit an annual financial report to Companies House.

As a small company (annual turnover of less than £10.2m and fewer than 50 employees), your reporting requirements are less strict than for large businesses, but no less vital. 

Financial reporting isn’t just a formality. It offers you, the business owner, an opportunity to gain valuable, actionable insights into your business. 

What’s financial reporting and why it’s important

Financial reporting acts as a record of your business activities, including cash in and out, debts owed, and assets owned. As well as avoiding penalties by filing your accounts on time, financial reports give you an overview of the financial health of your business

Types of financial statements

Three key financial statements are central to your annual reporting requirements: the balance sheet, the cash flow statement, and the profit and loss statement. 

Balance sheet

A balance sheet is a snapshot of the financial health of your business at a particular point in time. It records your assets (properties, equipment, stock), liabilities (overdraft, loans, debts), and shareholder equity. 

A balance sheet is valuable because it gives you, stakeholders, and even potential investors an accurate picture of the financial status of your business. From this you can judge anything from whether you have enough funds to meet short-term obligations to whether you might need to liquidate some assets. 

Cashflow statement

A cashflow statement shows the flow of money into and out of your business over a specific period. In other words, it shows where cash comes from and how you spend it. 

A cashflow statement is an important part of the picture because it’s a great way to monitor your working capital. It covers three core activities: 

  • Operational activities – everyday takings, including sales and dividends; and everyday outgoings, such as salaries, taxes and payments to suppliers
  • Investing activities – the purchase or sale of assets, loans made by your business and interest gained
  • Financing activities – any capital raised and distributed, such as taking out and repaying loans, issuing shares and paying dividends 

A cashflow statement is a more detailed insight into your short-term financial activities than a profit and loss statement as it shows the everyday transactions of your business rather than the overall picture of a given period. 

Profit and loss statement

The profit and loss (P&L) – or income – statement captures the revenue and expenditure of your business over a longer period of time. 

To find out whether you’ve made a profit or loss, you just need to subtract the value of all your incomings from the value of expenses. If that figure is positive, you’ve made a profit. If it’s negative, you’ve made a loss.

Unlike a balance sheet, which we earlier described as a snapshot of financial health at a particular moment, the P&L allows you to monitor it over a period of time.

>See also: Profit and loss template

Benefits of financial reporting

While it can seem like a chore, being diligent about your financial reporting responsibilities is a hugely valuable exercise in monitoring and managing the health of your business and can make you a better business owner as a result. Key benefits of financial reporting are:

Better debt management

Many business owners miss the signs that their business is in trouble until it’s too late. If you’re diligent about examining your balance sheet, you might spot that your liabilities are exceeding your assets – so that you’re likely to default on a debt – and take action to rectify any issues promptly.

Real-time tracking

Consistent recording of financial information will allow you to monitor and identify risks such as sudden changes in cash flow. For example, you might spot a bottleneck of unpaid invoices that could prevent you from meeting your upcoming obligations. 

Trend identification

Analysing your P&L statements can show you trends in profitability over time. For instance, you might identify unaccounted for seasonal shifts in loss or profitability that you can then assess and learn from. 

Better cashflow management

The cashflow statement gives you all sorts of actionable insights into your business. For example, if you realise that you’re consistently generating far more cash than you’re spending, you know you’re in a strong position to do anything from increasing dividends to investing or expanding. 

Staying on top of your reporting

Financial reporting is both a requirement and an opportunity to gain invaluable insights into the health of your business. These insights can be used to strategise, make better decisions and even avoid disaster. 

The best approach to financial reporting is to get into good habits by maintaining accurate records all year round. An accounting software partner like Sage can help with this. You can use its dashboards and reporting functions to keep accurate digital records and get real-time visibility into business performance. Visit Sage’s Making Tax Digital hub to find out more. 

Read more

Making Tax Digital for VAT post April – what now?

Henry Williams

Henry Williams

Henry Williams is a freelance journalist specialising in small business topics, such as Making Tax Digital.

Related Topics

Financial Management