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Profit and loss statement (income statement), profit margin

The most important report for any business is the profit and loss statement, also called a P&L or income statement. This report tells you how much money your business generates (or loses), but with a well-organized chart of accounts it will show details as to you spend most and where your money comes from. Small businesses should look at this report at least monthly, analyze trends and compare current results to the same period in the prior year and comparing the most recent month with the last few months. This should tell you what’s working well and what isn't, as well as help where you should pay more attention.

Net profit margin is the number of cents in profit that are generated from every dollar of sales. It is easy to calculate from data in the income statement. There is substantial variation in net profit margin between industries, it can also vary seasonally, which is why small businesses should track trends over time. Analyzing net profit margin on a quarterly basis helps manage pricing, expenses, and sales functions.

Balance sheet

A balance sheet gives you a snapshot of what a business has and owes at any given time. For small businesses, the most important assets are cash, bank accounts, accounts receivables. A balance sheet may also include properties, machines or equipment (eg. computers) and other saleable physical and intangible property. Liabilities generally include business loans, accounts payable (to suppliers) and anything else your business owes. On the liability side there are also owner’s equity (including startup capital and retained earnings).

When examining the balance sheet, it is crucial to look at the short-term assets versus short-term liabilities. If you have payments owed soon, you won’t want to run out of cash without noticing that your assets are illiquid.

Revenue by customer

Just as you should be looking at who owes you money, you should be looking at who gives you the most of it. Your revenue by customer report tells you how much you made from each customer over a period of time. Revenue from recurring customers is very important in many industries, so building good relationships with quality clients can turn into a reliable and profitable income stream.

However, beware of allowing too high a proportion of revenue from a single client. It creates a “revenue concentration risk.” Think of a single client whose leaving would ruin your entire business. It is vital to build a healthy, diversified portfolio of clients. This report can help with this.

Accounts receivable aging

After delivering your products or services to clients and sending the invoice, you also have to make sure those payments get paid and collected. Categorizing AR by length of time overdue (1-30 days, 31-60 days, 61-90 days, 90+ days) is typically easy for businesses to do automatically within an existing accounting system. Look out for customers who are perpetually late, usually pay on time and recently started paying late, and growing late balances from any customer.

Poorly managed accounts receivable (AR) is the leading cause of cash flow issues for small businesses, which is why it is crucial to immediately identify delinquent accounts and slow-paying customers. Refusing ongoing service or additional shipment requests to these customers protects businesses from being taken advantage of and maintaining financial interests. Setting this report up to run once a week helps companies take a proactive approach to managing the collections process.

Accounts payable aging

Your A/P aging report tells you who you owe and how much, since how many days. Paying late can sour relationships and may lead to late fees and other costs. You probably wouldn’t like it if a company took too long to pay you. As long as your books are updated, you can easily look at this report each week and find who you need to pay so you don’t miss the due dates, or at least you can communicate early to vendors that you will have some problems.

AR Days vs. AP Days Report

Accounts Receivable Days is the average number of days it takes a business to get paid for products/services, while Accounts Payable Days is the average number of days it takes a company to pay vendors or suppliers. The ratio between these two figures indicates cash availability. This report can help balance your short-term assets with your short-term liabilities.

This ratio can vary widely based on industry, so it is crucial for businesses to compare this metric to previous figures and to similar companies within the same industry. Periodically putting together this report and analyzing trends helps companies to adjust business operations, eg. changing payment terms for customers and/or work with vendors to secure more flexible payment options or shift invoice timing.