Financial Reporting for Small Business: Meaning in Metrics

Feb 17, 2022 Learn the value of financial reporting that can deliver insight, not just information, from ProCFO Partners

For many small businesses, the financial reporting required isn’t all that sophisticated. A few key measurements can help you understand your basic financial health. On the other hand, a lot of reporting is done with a laser focus on detailing the metrics – but lacks insights on their meaning.

Financial reporting and metrics are not just numbers on a spreadsheet or graphs. They are the very basis for how a company operates and whether it is successful.

Financial reporting is the process of providing information about the financial activities of an organization. Financial metrics are used to measure performance in order to identify trends that may be beneficial or detrimental to the organization’s objectives, and often they’re necessary in relationships with bankers, investors and other stakeholders.

It is important for any business leader to understand these concepts because they can provide insights into what direction a company should take in order to be successful.

Keep it Simple With Financial Reporting

Small business owners should know what financial reports to look for each month. This will help them to make more informed decisions and have a better understanding of the company’s performance.

The three financial reports that are most important to a small business owner are the cash flow statement, balance sheet and P&L (profit and loss) statement.

The balance sheet is an accounting statement that shows a company’s assets, liabilities and equity at a specific date. A balance sheet is an important financial report because it shows the company’s financial position on any given day.
The cash flow statement helps people understand how well the company generates cash from its operations and uses cash to run its business on any given day.
A P&L statement, also called an income statement, summarizes the sources of income and the costs associated with generating those revenues. A company’s net profit or loss for a given time period is shown on one line at the bottom of the statement.

With just these three reports, most small businesses have the information they need to understand their financial health and start making informed decisions. But information isn’t insight. The numbers tell a story, not just about your company today but about the opportunities – or obstacles – on the horizon.

Putting The Right Minds to the Metrics

The right financial partner can help a company to focus on its goals and strategies by providing insights into the company’s finances. They also help to understand financial reports and identify potential risks for the company.

In some cases this person might be your existing accountant or bookkeeper. Start asking questions. Why are we seeing a revenue drop? How can we increase profitability? Ask for actionable answers. It’s not enough to just know the numbers – they need to help you drive strategy and create a sense of direction.

It’s essential that your financial partner has a point of view. The advantage of a CFO, for instance, is to draw on their professional expertise and experience to help shape strategy, based on financial realities. At ProCFO Partners, our network of fractional CFOs can be especially valuable because we have deep knowledge about a variety of issues. For the small business owner, there’s a significant advantage to engaging high level expertise without the costs of hiring a full-time CFO.

With perspective comes prioritization. You want somebody on your financial team who can ask hard questions or deliver hard news. Who can help you make decisions and execute on next steps. It’s critical to have a partner who can think operationally and also at a very high level. It’s not enough to report your gross margins are low – you need to know why, and possible solutions to address issues, and practical, actionable next steps.

Know Your Role, Expand Your Potential

It’s not difficult to access information about your business in monthly reports like cash flow statements, balance sheets and profit and loss reports. It’s more difficult to capture insights about those numbers.

Small business owners and leaders have a lot to do and think about, and often wear many hats. Understanding the nuances of financial reports is often not among the top skill sets of these leaders, and it’s certainly not why they started the company. Yet as a leader, your ability to know and address the key performance indicators in your monthly financial reports are essential to your future success. In order to take action on what your financial reports are indicating about your company, look for guidance from a trusted financial counterpart.