There are lots of moving parts in a small business. Your customers may only see the final product or services, but that doesn’t tell the full story. Behind the scenes, you will have a lot to keep track of. To help you simplify running your business,
Here are 5 Important Documents for Small Business:
1. A spreadsheet tracking money received and money owed
Although a balance sheet will contain this information, keeping track on a spreadsheet can be useful too. A spreadsheet can help you keep track of the money your business receives and any that is still owed to your business, or the money your business still owes.
This information helps you keep your organization running smoothly as you can chase up money that you are owed. You can also build good business relationships by making sure you pay the money you owe on time. It can be easy to lose track and forget due dates without having all this information in one place where it’s easy to find.
You can make it easy to find details by amount, date paid or due date, and any relevant notes. If you find that you need to add more information to the spreadsheet, you can always add more sections. These sections can be adjusted and different versions can be created for each purpose. For example, you might want to show a potential investor, but they may not need to see confidential information, such as the details of your clients or debtors.
Putting the right information will help to avoid costly mistakes, so it’s essential to double-check your figures at the time of inputting them and also at regular intervals against bank statements. Entering information related to your business transactions on a daily basis will help you keep on top of this task. This can also help you with your balance sheet – which we discuss later in this article.
As with most important documents for small business containing data related to your customers and business transactions, if there is sensitive information included, your spreadsheet should be password-protected.
2. Income statement
An income statement is one of the important documents for small business that provides details to show the profit and loss within your business activities. It helps to define your company’s bottom line, showing business performance during a specific reporting period.
You can keep track of your profits by calculating the total revenue. The next step is to subtract the costs of goods your business has sold. This includes material and wages or fees paid to freelancers, etc. This figure will reveal your gross profit.
Then, you subtract your rent, utilities, and any other operating expenses from the gross profit to work out your operating profit.
Finally, using your operating profit as the starting figure, take off other expenses, such as tax, interest and legal fees. This will reveal your net profit. In some cases, it may show your business has made a loss, but it’s better to know. Then you can readjust your business plan.
For example, a clothes shop owner might have $50,000 revenue for the sales of clothing and accessories. The cost of inventory might be $20,000. So his gross profit is $30,000. Rent salaries, utilities and marketing (operating expenses) total $15,000, making his operating income $15,000. His non-operating items are $1000 (interest income) and $500 (interest expense). Therefore, his net income before taxes is $15,500. His income tax expense is $3,100 at a 20% tax rate and his net income is $12,400 – based on subtracting $3,100 from $ 15,500.
Overall, this would show the clothes shop is profitable and has the potential to continue growing.
It may sound complicated, but you can use an income statement template to simplify the process of creating this document.
Some of the benefits of this statement include finding areas of your business where you can cut costs if needed, whether any cuts have impacted profits (compared to previous income statements), and whether sales and profits have improved.
For example, a business owner might discover that the cost of utilities has risen while sales haven’t. This might prompt him to look at energy efficient alternatives that save money in the long term. Besides saving money, he might also be able to market his business as a sustainable organization. This could increase sales and also make the company look appealing to investors.
3. A Cash flow statement
Your cash flow statement should show that your business has the financial ability to pay the money it owes. Even businesses with a track record of making high profits can struggle to free up cash to meet their immediate financial obligations. This is because they may have money tied up in different investments – making their short-term cash flow limited.
Your cash flow statement very important documents for small business that will show the details of your outflows as well as your inflows, highlighting how much your business has available.
This includes operating activities, such as the money brought in by your main business operations, and the net profit or loss.
An example of a positive cash flow statement could be the following:
A bakery owner has an opening cash balance of $8000 at the start of January. By the end of January, she makes $12,000 from selling baked goods. Because she has less demand for deliveries, she sells an old delivery van for $4000, and also gets a business loan of $7000. This would give her a total of $31,000 of available money for January. Therefore, her business is cash-flow positive, and she has the ability to invest in her business.
4. A balance sheet
A balance sheet is very important documents for small business that can be thought of as a summary of your company’s current finances, showing data such as equity, assets and liabilities.
Your equity includes your (as the business owner) or the organization’s net worth.
Existing company assets will include anything that could sell within a year, such as inventory, smaller equipment owned by the business and debt (owed to you). Long-term assets are different, as they usually take longer to sell. These might be business premises and other real estate, and industrial machinery.
Your company may also have intangible assets, such as trademarks and patents. A business may be able to sell these, but the rules can vary in different US states about the sale of these assets, which fall under the term of intellectual property.
Liabilities include any debt your business owes and these fall into two categories. Current liabilities are monies owed in the short term, covering employee salaries, energy bills, rent, and short-term loans.
Long-term liabilities include mortgages and loans that will typically take more than a year to repay.
One of the uses of a balance sheet is to show potential investors the value of your company. This is essential if you want to attract shareholders and demonstrate past growth and how this may continue in the future.
Another use is to help the business identify which changes are needed to improve its longevity.
5. Tax returns
Last but certainly not least, a tax return is one of the important documents for small business to have. These documents have several uses.
The most obvious use is for businesses to comply with US law. Completing and filing tax returns in time help a business to avoid fines and other legal action. It also shows any shareholders in the company that the business is financially viable and responsible.
The document benefits the business in other ways. It’s another way to provide a summary of the company’s finances and to compare these to previous years. This helps to spot any trends, areas that have improved and those which need to be looked at more closely to ensure continued growth.
If you do decide to expand your business, you might need to apply for loans or attract new shareholders. Your company’s tax return can help with this, proving the profitability of the organization and good financial management.
The key document can also help be examined to find ways of legally reducing the company’s tax bill by taking advantage of deductions and credits that are available. You might choose to pay a professional to help with this as the money you save can be more than you pay them.
Having access to your tax returns also reduces the stress, making them easier to find if your company is audited. Being prepared means that the audit will cause minimal disruption to your business, leaving you free to focus on more important tasks, instead of scrambling to find or put together documents detailing your company’s finances.
By ensuring you have a Key document that you can easily access, including the five mentioned in this article, it will be easier to keep your business profitable. The valuable information they provide makes it possible to make regular improvements, boost profits and show investors and tax inspectors everything they need to know.
