3 Important (and Common) Accounting Reports for Businesses and What They Say
The saying goes "businesses will live and die by their cash flow." At the same time, many businesses will report their financial information on the accrual basis of accounting. Because of this there are various reports needed to understand the short-term obligations of a business from the cash perspective. Today we're going to be looking at 3 of the most common accounting reports used by businesses to bridge this gap between the accrual reporting standard and their standard operations.
Accounts Receivable (AR) aging
When putting in a customer invoice to your accounting system, it should be loaded into the accounts receivable module. The AR aging report lists all these invoices that haven't been collected as of the date that you from the report. It also shows the amounts that are currently due and overdue by increments of 30, 60, or 90 + days. Generally, companies run this report by the customer name, so they know how much each customer owes them at a given point in time. By examining this list, the business owner can figure out which customers are paying timely and which ones might be late due to some Financial stress. For any business, knowing how much money is likely to come through the door in the next 30 days is essential to keeping the operation running. If you can rely on the cash inflow generated by your customers, then operating decisions to spend the money you have on hand now will be a lot easier to make.
Accounts Payable (AP) Aging
Like the AR aging report, the AP aging report breaks out the amount due to the businesses' vendors at any given point in time. This report will also show the amounts currently due to vendors and overdue by increments of 30, 60, or 90 + days. Some businesses prefer to hold cash for as long as possible and pay off their invoices at the latest possible time. Other businesses will look to make use of prompt pay discounts or simply pay immediately to maintain a better relationship with their vendors. In either case the AP aging report is instrumental in helping make those decisions. Similar to the AR aging report, knowing how much money is going to go out the door in the next 30 days can be instrumental and supporting decisions that keep the company operating. being able to prioritize which vendors you will pay first and when you will pay them will help streamline decisions when the company is short on cash.
Bank Reconciliation
The final report is the bank reconciliation, while this might not really apply too much to businesses that do everything by Bank transfers, it is essential to understand this concept to bridge the gap between the bank statement and the accrual basis reporting of cash. Under the accrual basis of accounting if you write a check to a vendor that is cash out the door even though they haven't cashed it yet. What this means in practical terms is that your bank account could be $1,000 higher than what is recorded on the business' books. the bank reconciliation report takes these items into account and quantifies them to reconcile the difference between a bank statement amount and the book amount at any given time. For the companies that write checks this is one of the most important reports available as it can have a significant impact on operating decisions. if a business owner looks at their bank account and thinks "hey we have $50,000 available, let's pay off our $30,000 loan!" without knowing there's a $40,000 check outstanding and waiting to be cashed by another vendor, then issuing the check for $30,000 will cause one of these two vendors to see their check bounce due to insufficient funds. it is critical that businesses make their operating decisions based off the cash they truly have available which is not always the number on the bank statement.
There you have it! That was a quick overview of the three most common accounting reports used by small businesses. Do you have another accounting report you like to use for a small business let us know in the comments!