Financial reports allow you to monitor results, keep your company on track, and plan for the future. They are also critical in keeping your external financial partners informed.
One set of financial statements can’t do all those jobs, and that’s why you need to create several different types of financial reports. You use the same information to generate different types of statements. The trick is to organize them properly to provide the right information for each purpose.
Here are the 3 types of financial reports to prepare and what they should contain.
1. External party financial statements
In most circumstances, your external partners will want to see financial statements prepared by an outside accountant, so they can get a reliable, objective perspective on how your company is performing.
Bankers need to know whether your operations are healthy and generating sufficient profit to comfortably service your debt. A banker is only going to look at certain line items and say: Do you have reasonable performance metrics and are you making money? Are you generating wealth? They really want to make sure you’re on a sound financial footing.
Investors are likely to look more deeply, tracking data that allows them to judge whether the capital they’ve deployed to your company is generating an adequate return. This means they will be interested in the profitability of your business and what kind of growth you are generating.
Generally, they want to know the rate of growth of revenue and whether profits are growing at the same pace. If profits are growing faster, it means you’re containing your costs. If profits are falling and revenue is going up, they’re going to want to know what’s going on there.
2. Projections and forecasts
Financial forecast for the upcoming period is another important type of report. Forecast allows you to create operating budgets and plan for resource requirements. It also gives you something to shoot for, spurring improvement. It’s a way to stretch your company, improve and grow.
Business owners often resist making forecast, thinking they don’t have a crystal ball to predict the future. Yet, historical results provide a good starting point to predict how much sales you need to break even and how much revenue or profit you will generate during the year.
It’s really important to know how you’re tracking against your forecast to make sure that you ultimately break even and earn a profit. If you see you’re falling short, you’ve got to be able to cut back your costs or increase sales so that you don’t end up in the red.
3. Internal reports
At a much more detailed level are management reports that are generated for internal use only. Where you might provide an investor with summary on marketing expenses, your management report might break this information down into different elements for instance, corresponding to your spending on different marketing channels.
Management reports provide information at a much more detailed, granular level, and you should not give the privilege of understanding that level of detail to external parties. They don’t need to know how much money you spend on paper clips each month. That’s none of their business. It’s enough to say it’s in your supplies budget.
Your management report should isolate your sales and expenses by business line or product and can go further to track performance by geographic region or even by customer. You should also track important financial ratios and key performance indicators.
All this information gives you a clearer understanding of how different parts of your business are performing and where the money is earned and where its going.
It is also highly recommended to do forecasts by segment of the business and formulate budgets for each of these segments. So, when the results start coming in for each of the segments, you can measure whether they are tracking on plan. If not, you can make necessary adjustments early on.