Why Financial Reporting Standards Are Key for Your Small Business
August 30, 2024 | Last Updated on: August 30, 2024
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August 30, 2024 | Last Updated on: August 30, 2024
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Business isn’t always very formal. Some small business owners are better than others at keeping specific accounting and financial records for their businesses. Even if you’re not the most organized or numbers-savvy person, it’s still vital to implement small business financial reporting standards in your small business.
Financial reporting standards are the principles used to guide the preparation of a business’s financial reports for stakeholders and tax agencies. Financial reporting standards for small businesses are not as stringent as those for massive corporations with companies within companies; in fact, for many, reporting doesn’t have to be very complicated.
Although there may be a learning curve involved — especially for small business owners with little to no bookkeeping experience — implementing the right financial reporting standards will help your business drive profits and stay compliant with government regulations.
3 Key Takeaways:
In this article:
Most small businesses in the United States utilize Generally Accepted Accounting Principles (GAAP), established and maintained by the Financial Accounting Standards Board (FASB), as their financial reporting standards. Most other countries use International Financial Reporting Standards (IFRS), which was established by the International Accounting Standards Board (IASB).
U.S. GAAP is a set of accounting rules to guide the preparation, reporting, and presentation of financial statements. Following basic GAAP standards helps organizations ensure accurate, consistent and transparent financial disclosures.
Under both U.S. GAAP and IFRS standards, some of the most common types of financial reports for small businesses include:
Small business financial reporting is only as good as the number-crunching behind it. While many small business owners opt to use accounting technology or hire an accountant to handle these calculations, these formulas are still good ones to know to support revenue recognition.
That last section was heavy on terminology, which can be intimidating for some small business owners. Many entrepreneurs do get by with less formalized small business reporting standards, but following GAAP or IFRS is important for two major reasons: planning and compliance.
Financial reports provide deep insight into your business’s health. Looking at your business bank account’s balance on a given day isn’t exactly savvy financial sleuthing. Keeping detailed financial reports provides a conceptual framework for business owners to understand how the business is doing and optimize a business plan.
For example, a company that manufactures stone pavers may see a spike in sales in April when more people are taking on home improvement projects to enjoy the outdoors in the summer. With that knowledge, the company plans to pull back on production in October when demand subsides, putting aside cash reserves to ramp production back up in February and March to meet the April demand head-on. The company doesn’t lag behind the annual spike in demand and fully capitalizes on its most profitable time of year.
Financial reporting isn’t just about driving business success, however. It’s also crucial in avoiding business setbacks. Not only can reports help business owners avoid spending money they don’t have, but they’re essential for proper financial disclosures to state and federal agencies. Nearly all states require some kind of annual report, in addition to tax filings. If there are mistakes or inconsistencies on either of these filings, your company may be audited, in which case you will need clear, consistent financial reports to avoid tax penalties or fines.
These best practices can help your business maximize the value of its financial reports.
Your financial reports are only as good as the data they use. To ensure that’s the case, always pursue the four c’s of good data: Correct, Current, Complete, and Consistent. By ensuring that your data meets these criteria, you can reduce errors and inaccuracies that can lead to bad decisions, expensive mistakes, or erroneous reports.
Always verify and validate data before using it in financial reports. Implementing a data governance framework that includes data quality checks, data audits, and data validation can establish stronger data practices to support your reporting. High-quality technology can help streamline this process.
The more you look at your financial reporting documents, the better you can confirm their accuracy. Whether you only have the time to review documents monthly or you want a daily breakdown of your company’s financial health, make sure you’re consistent with how often you review financial reporting data. That way, you’ll have a baseline for comparability each time you review.
When you set up a consistent frequency, it’s easier to check progress against certain time benchmarks. So, you can ensure consistency if you want to track data changes week-over-week, month-over-month, or quarter-over-quarter. You can always make amendments to reporting frequency as needed.
Small business financial reporting is all about using that data. Performance analysis uses your financial reporting data to evaluate the business’s (or product) performance. Using the data you’ve gathered, small business owners and other key stakeholders should analyze it to identify areas of materiality that are strengths and those that could use improvement.
Performance analysis can be enhanced by benchmarking your business’s performance against industry standards. Combining the two can help business owners understand where they lag behind competitors and what aspects of the business require more time and resources.
Numbers are great, but they’re only part of your small business’s story. As you assess reports, add narrative context where appropriate, like a new product launch at the start of one of your most profitable weeks of the year or a machinery breakdown that required higher maintenance expenses than usual one month. Narrative amplifies the conceptual framework of your reporting.
Your financial reports should have clear summaries and financial analysis written by leaders and key stakeholders to help a reader make quick takeaways. Not only will that context help you make business decisions going forward, but it provides some historical context to your business, too, so you can look back in the future and see why you made the decisions you did.
Financial reporting can be time-consuming and challenging. Fortunately, there are many tech tools on the market that leverage financial instruments to streamline the reporting process. Technology can help:
Some of the top tools on the market include:
Once you’ve implemented afor your business and have the technology or personnel in place to maintain the 4 c’s of data collection, you’re ready to use your financial reports.
But how do you do that? Really, it depends on your business.
Financial reporting software or an accountant can help you figure out the most important numbers for your review and visualize data in ways that make sense. Looking at how financial information changes over time, along with the narrative context you’ve added, will help you understand how certain decisions have impacted business results. That will inform your decisions going forward.
Very lean businesses with just one or two decision-makers may review financial reports once a month to analyze the previous month’s financial performance and focus in on broader numbers like gross profit, expenses, and net profit. Larger organizations with more complex business combinations may want to dig deeper into the numbers to see how specifics like outstanding debts, property leases, shipping costs, and production volume impact profits over time.
Implementing small business financial reporting standards is a good way to understand your business’s performance and help avoid tax penalties and compliance violations. Proactively managing your financial reports and incorporating best practices can illuminate opportunities to save money or take advantage of business opportunities. That way, your small business will be better set up for success.
Financial reporting standards are the principles used to guide the preparation of a business’s financial reports for stakeholders and tax agencies. Proper financial reporting helps businesses plan effectively, optimize operations, drive profits, and remain compliant with government regulations.
The best way to improve financial reporting is to institute excellent bookkeeping and accounting policies. Companies can do that by hiring a professional bookkeeper or accountant or purchasing an accounting software.
To improve their financial reporting standards, small businesses should adopt a data governance policy that observes the four c’s of data collection: Correct, Current, Complete, and Consistent. Establish a consistent monitoring and reporting schedule for financials and always add narrative context to numbers whenever possible to better understand why numbers deviate from the norm.
Small business owners should review financial reports at least once a month to monitor the company’s progress toward financial goals and ensure accurate reporting.
Some of the best tools to standardize financial reporting for small businesses include Xero, Planful, Dataralis, and Tipalti.