Financial Reports for Small Business

The whole point of having bookkeeping software to manage your business is so that you can get the answers you need when you need them.  Regularly reviewing your reports will ensure that you stay informed so that you can make educated business decisions.  The two most common reports that you should be reviewing for your business are the Profit and Loss and the Balance Sheet.  These are also the reports that financial institutions are likely to request if you are applying for a business loan or anything of that nature.

Let’s take a quick look at how to access those reports in QuickBooks Online and how to understand the information once you have run the report.

How To Run Reports

In QuickBooks Online, to get to the Reports homepage, simply click on Reports on the left side of your screen. This will take you to the reports homepage. There are a wide variety of reports that you can run to get information on how your business finances are doing.

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Keep in mind that the key point of reports is to make sure that you have the answers that you need to your questions about your business. How is your business doing? Are you meeting your goals? Who is your best customer or best-selling product or service? All of these tools are there so that you can make educated business decision. So it’s a great idea to review your reports on a very regular basis.

Profit and Loss

The first report that we’re going to discuss is your Profit and Loss report. The Profit and Loss includes the income that you make from your customers, your cost of sales, and your overhead expenses. Cost of sales, or cost of goods sold, are your direct expenses. These are the products or services that have a direct relationship to what you are selling to your customers. That can include the products that you purchased for resale and the labor that you do for your customers. Your sales minus your cost of sales will give you your gross profit. It’s important for you to see the ratio, or margins, of your direct costs to your sales so that you know whether the work that you’re doing is profitable.

Your expense accounts in QuickBooks are for your company overhead, or indirect expenses. These are the costs of doing business that are not directly related to the products and services that you sell, for example, your rent, utilities, or office supplies. These are all things that you need to run your business, but you are not reselling them to your customers. When you subtract your expenses from your gross profit you get your net profit. This is also known as the bottom line of your business, simply because it’s the bottom line on your most important report.

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Profit and Loss vs. Balance Sheet

Think of the Profit and Loss report as the movie of your company over a set period of time; it shows you all of the ins and the outs and it tells the story of that time period. By comparison, the Balance Sheet is the photograph; it shows us a snapshot of your business at a single point in time, and it is always a cumulative of everything that happened up to that point in time.

Balance Sheet

The Balance Sheet shows us your asset accounts, which is everything your company owns. Assets include the money in the bank, furniture and equipment, as well as your accounts receivable which is the money that is owed to you by your customers on open invoices.

Next on the Balance Sheet we have your liability accounts, which is everything that your company owes to others. This can include credit cards, business loans, and your accounts payable, which is money that you owe to your vendors on unpaid bills. Finally, on the Balance Sheet we have your equity accounts. Equity is your company’s net worth. These accounts show the amount that you have invested into and drawn out of our business over time, as well as the retained earnings of the business. Retained earnings is the sum total of all of your net income over time. If we were to run your profit and loss for all dates, and your balance sheets for all dates, the retained earnings on the balance sheet would match the net income from your P&L.

The balance sheet will always balance, meaning that your total assets will equal your liabilities plus your equity. You can see at the top of the report all of your current assets, and at the bottom of the report is the liabilities and the equity. QuickBooks Online will not allow you to record an unbalanced transaction, so you don’t need to worry about getting your balance sheet off balance. These numbers will always equal each other. The important thing to keep in mind about the balance sheet is that it’s very important to run this report to help ensure that your business books are correct. For example, if you have a negative number in one of your bank account balances, there is either an error somewhere in your books or you might be bouncing checks. Either way, you want to review and understand this report on a regular basis for proper business health.

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To see more detail about running report, including how to customize and memorize reports, make sure to check out Episode 12: Reports in the Polymath QuickBooks Tutorial Series.

Please comment below with any questions that you have about reading and understanding financial reports.

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