6 Reasons Why Financial Reports Are Important to Small Businesses

6 Reasons Why Financial Reports Are Important to Small Businesses

February 16, 2024 | 3:46 pm

Are you running a small business? Pay attention to those important financial reports! These key reports become your secret weapon, helping you understand how well your small business is doing and where it’s headed.

The data from these financial reports are not just about the past; they’re like the roadmap for your business’s future. Don't skip out on the valuable insights they offer.

Dive into this guide to learn why each financial report is a big deal and how they can make a real difference in your small business journey. Your path to financial clarity and success starts here!

What are the 3 most important financial reports for a small business?

Businesses disclose their financial performance, position, and cash flows through financial reports throughout a specific period. These reports provide information on how much money a company has, where it is from, and where it goes.

Here are the three critical financial reports every small business needs:

A small business should prepare three important financial statements

Income statement

The income statement, also called the profit and loss statement, measures a company's profitability. This financial report lists the business's sources of revenue, which typically comes from sales.

Similarly, the income statement summarizes all company expenses, including the cost of goods sold (COGS), administrative and marketing fees, taxes, interests, and miscellaneous expenses.

The end of the income statement shows the net income or bottom line, which comes from deducting all expenses from the revenue. But, if the business's expenses exceed its revenue, the income statement will show a net loss.

An infographic of the key components of an income statement.

Balance Sheet

Another important financial statement to consider is the balance sheet. A balance sheet showcases the company’s financial position, typically during the end of the reporting period.

What is the purpose of a balance sheet?

Specifically, a balance sheet shows a business’s assets, liabilities, and shareholder’s equity:

  • Assets: Assets generally include the company’s liquid assets like cash and cash equivalents and cash receivables, which is the money the business has yet to receive from its customers. Other assets included in the balance sheet are inventory, capital assets, and investments.
  • Liabilities: This section includes accounts payable, bills, or invoices the company needs to settle. Considered liabilities, too, are wages payable, dividends payable, and long-term debt.
  • Shareholder’s equity: Also known as stockholder’s equity, this amount represents the company’s net worth. You can compute the shareholder’s equity by subtracting liabilities from assets, which shows the amount of money the shareholders can claim.
An infographic of the key components of a balance sheet.

Cash flow statement

As given in the name, a cash flow statement summarizes all cash inflows and outflows the business had in a given period. This financial report represents a company's liquidity and how it manages its cash effectively.

Three components of a cash flow statement

An infographic of the key components of a cash flow statement

There are three components to a cash flow statement: operating, investing, and financing:

  • Operating: This portion shows cash flows related to the company's regular activities, including inflow from sales and outflow from running the business.
  • Investing: The investing section lists cash flows related to purchasing long-term or fixed assets and any cash gains from business investments.
  • Financing: All cash transactions related to financing the business are part of this section, including bank loan payments, dividend payments to shareholders, and funding from investors.

Dive into this video for a deeper understanding of the three components of a cash flow statement:

Why are financial reports important to small businesses?

Beyond being mere guides, financial reports provide owners and stakeholders with indispensable insights into the financial health of their ventures.

These reports are not just about numbers on paper; they reveal the business's performance, strengths, and areas for improvement.

Below are the core reasons financial reports play a pivotal role in steering small businesses to make informed choices, spotting trends, and maintaining sound financial health.

Reasons why financial reports are important to small businesses


Financial reports are invaluable tools that enhance the decision-making process. They show how well the company is doing financially and if it’s making money. With these reports, businesses can make smart moves for success and growth.

Business owners use income statements to measure profitability. Since this report summarizes the company’s revenue and expenses, the owners and management can review this to strategize how to increase their net income or recover from a loss.

On the other hand, the balance sheet helps small business owners make informed choices about investments, loans, and other strategic decisions. A well-balanced balance sheet ensures the business is not overburdened with liabilities and has the necessary resources to support its ongoing operations and obligations.

Entrepreneurs also need to make decisions for the year ahead. Cash flow statements greatly help project future inflows and outflows, which is crucial in proper budgeting and planning.

Attracting investors

When you raise funds or capital from investors, your business’s financial statements become vital. Financial statements reveal information about the company’s financial health, which helps investors decide if they should give you any money.

Investors look at different financial metrics when assessing a company. But some of the most basic ones they can quickly check from your reports are sales, profit margin, debt, and cash flow.

Sales and profit margins are two essential metrics from the income statement. Many businesses think of helpful products, but your sales define if people are willing to spend for them.

Is your business worth the investment?

Additionally, investors also check if the business makes enough profit and if it can grow to determine if they can get good returns on their investments.

Debt is also one of the things investors are wary about, especially since it can eat up on the cash flow.

Businesses with high debt-to-equity ratios based on their balance sheets are riskier to invest in. These companies may have reduced liquidity, as a significant portion of their cash is committed to servicing debts, limiting their financial flexibility and increasing susceptibility to financial challenges.

Financial statements are not only for the benefit of your business but are also requirements for legal compliance.

The Bureau of Internal Revenue (BIR) requires businesses earning gross sales of more than ₱3,000,000 to submit audited financial statements (AFS) along with the annual income tax return (ITR).

According to the Revised Corporation Code, corporations with total assets or liabilities of ₱600,000 or more must submit their AFS to the Securities and Exchange Commission (SEC).

Also, remember that the BIR should stamp the AFS before submitting it to the SEC.

On the other hand, corporations that don’t meet the ₱600k threshold by the SEC should still submit annual financial statements, accompanied by a duly notarized Treasurer’s or Chief Financial Officer Certification.

Are financial statements used for tax purposes?

Financial statements become strategic documents, reflecting past financial performance, and are handy when filing taxes. The net income reported in the income statement forms the foundation for accurate and compliant tax filings.

Additionally, the detailed breakdown of expenses helps businesses maximize tax deductions, ensuring efficient financial management and regulatory adherence.

To discover insights on tax deductions and effective strategies for saving on taxes, check out this video:

Line of credit and loans

For businesses, maintaining accurate and up-to-date financial statements is not just a compliance requirement; it is a strategic imperative to foster trust with financial partners and access the capital needed for growth and operational needs.

Businesses can use their financial statements to see if they can take on more debts. Comparing the current assets and liabilities and investigating the company’s cash flow will give insights into how the business can manage its resources and settle its debts efficiently.

What is the importance of financial statements to the banks?

Financial statements are paramount for banks and financial institutions when assessing the creditworthiness of businesses seeking loans or lines of credit. These statements serve as a comprehensive financial snapshot, offering insights into a company’s fiscal health, stability, and performance over time.

Lenders scrutinize key components such as liquidity, profitability, and solvency to gauge the business’s ability to meet its financial obligations. A robust set of financial statements instills confidence in lenders and facilitates transparent and informed decision-making.

Performance evaluation

Similar to how investors analyze financial statements to determine a company’s investment potential, businesses can leverage these reports to gauge their growth and performance.

The data provided by the financial reports can be used to monitor how the business is performing and lay the groundwork for informed decision-making.

4 KPIs to gauge small business performance

Identifying key performance indicators (KPIs) to guide small businesses is crucial. These metrics, extracted from the financial reports, show the business's performance, stability, and potential.

The KPIs you monitor may be dependent on the nature of your business and performance criteria, but here are the basics:

A table of the top 4 financial performance indicators that every small business should track.
  1. Year-over-Year (YoY) Revenue Growth:
    Assessing a business's ability to boost revenue year over year is crucial for strategic planning. Positive growth indicates a growing business and successful strategies, while negative growth may prompt a closer look at sales and marketing strategies.
  2. Net Profit Margin:
    Measuring the percentage of revenue that transforms into net profit, the net profit margin is a guide for effective cost management. A healthy margin signifies sustainable profitability, guiding operational efficiency and resource allocation decisions.
  3. Return on Investment (ROI):
    The efficiency of investments made by the business is revealed through ROI, indicating if expenditures generate justifiable returns. A positive ROI reflects the success of strategic financial decisions and overall financial health.
  4. Debt-to-Equity Ratio:
    The proportion of debt to equity in a business is assessed through the debt-to-equity ratio. A lower ratio suggests lower financial risk and a healthier balance between debt and equity financing, ensuring financial stability and smart resource allocation.

Transparency and accountability

Clear and comprehensive financial statements go beyond mere documentation. They play a pivotal role in fostering transparency within the business and among external stakeholders.

By meticulously reporting financial information, a company showcases its integrity, a cornerstone in establishing and maintaining strong business connections.

Moreover, a company with complete financial reports shows it has nothing to hide, building trust with its partners, investors, and employees.

Why is accountability important in financial management?

Financial statements go beyond numbers, serving as a critical tool in fostering accountability within a business.

These statements offer a detailed insight into how a company manages its resources, handles outstanding debts, allocates funds for current expenses, and plans for future investments.

In essence, financial statements serve as a tangible representation of the company’s commitment to responsible financial management. This assures stakeholders of its dedication to sound business practices and creates trust and belief in how the company manages its money.

Unleash growth with strategic financial reporting

Financial reports, including income statements, balance sheets, and cash flow statements, are indispensable tools for small businesses. They guide decision-making, assess performance, and play a pivotal role in establishing connections that propel business growth.

Recognizing the significance of these reports, entrusting finance experts like OneCFO is a strategic business move!

OneCFO serves as your all-in-one CFO, bookkeeping, and tax assistant. With our team of finance and accounting professionals, we ensure that all your financial reports are accurate, insightful, and consistently prepared on time.

Explore the possibilities with OneCFO by visiting us at onecfoph.co or contacting us at [email protected]

Let’s elevate your financial reporting, setting the stage for your business success.

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