Financial Reporting Guide For Small Businesses

Erwan Philippe

As a small-business owner, you need to stay on top of many different aspects of your business: marketing your products or services, managing your staff, securing funding and investments, creating business strategies, and making sure you don’t break the law while doing all of these and more.

The ultimate goal? Profitability. Excellent financial health.

Knowing your financial status is important, both to external entities (the government, finance institutions, and investors) and to your organization’s internal stakeholders and decision makers. The process of producing statements and reports for these stakeholders is a vital aspect of financial reporting.

Financial reporting needs for small businesses are quite different from those of large, publicly traded companies. This quick guide will tell you all you need to know about financial reporting for your business.

Preparation of financial reports

An effective financial report should give you a good idea of how your business is faring. To do this, you should be able to evaluate and analyze your data based on different standards or benchmarks. How did your business do over a certain period of time? Are you doing better, worse, or similar to other businesses in your industry? Are you making money or losing money?

Your financial reports show how much your business is worth, how much you are making or losing, how much of your income is taxable, and how much money is going in and out of your business through its day-to-day transactions. On one hand, an accurate picture of your company’s financial health gives you a sound, data-driven basis for future decisions and strategies to further improve your business. On the other, people outside your business will also expect you to have financial statements. Most commercial banks, for instance, require financial statements to facilitate the approval of business loans.

Your financial report must have these three key components: the balance sheet, income statement, and cash flow statement. Keeping these statements accurate and up-to-date is crucial to the success and survival of your business. Even the slightest accidents or mistakes can cost your business thousands or millions in losses.

Balance sheet

Your balance sheet is a snapshot of how much your company is worth, taking into account your assets (the cash and property you own), liabilities (debts and other obligations), and equities (the value of your interest in the company).

This is expressed by the formula: Assets = Liabilities + Equity.

Your financial report must show that both sides of the equation are equal or, as the name suggests, balanced.

Correctly classifying assets and liabilities is one major challenge to small businesses when running balance sheets. A long-term liability accidentally entered as a short-term liability, for example, will make it look like your company is obliged to spend on debt payments sooner rather than later, making your company look less financially healthy to potential financiers.

Balance sheets are usually locked at the end of the year since it’s highly unlikely that any changes will have to be made after closing the books. A lot of solutions that businesses use, however, are not able to do this. As a result, accidental entries may mess up your business’ balance.

To work around this, you can do one of two things. First, you may check your balance sheets every once in a while to make sure that no unnecessary changes have been made. Your second option is to put systems in place to make sure that balance sheets from previous years are saved as historical documents that can no longer be edited.

Income statement

Also known as a profit-and-loss statement, the income statement is a report on your company’s gains and losses over a certain accounting period. It records every sale and operating expense, down to the last dollar, as well as accruals such as foreign exchange gains and losses.

Just like with balance sheets, the accuracy of your income statement can make or break your company. Any inaccuracy may result in diminished profitability ratios, which can hinder you from securing the loans or investments to grow your business. It can also lead to unnecessary costs as well as errors in inventory projections.

An income statement includes two main components: operating and non-operating. Both of these include revenues (total sales) and expenses (costs of goods or services sold, plus expenses such as rent, salaries, utilities, and bank fees). Take note that you must include both cash and non-cash gains and losses.

Cash flow statement

Your cash flow statement shows where your money comes from and where it goes. While it seems almost similar to an income statement, cash flow statements include only cash transactions. Income statements includes non-cash gains and losses.

This part of your financial report is a summary of inflows and outflows of cash from three key financial activities:

  • Operations
  • Investing
  • Financing

The net inflows and outflows must equal the cash balance increase or decrease as indicated in the income statement. Hence, to prepare the cash flow statement accurately, you must make sure that other parts of your financial report – the balance sheet and income statement – are accurate as well.

Since your cash flow statement is a gauge of your business’ overall liquidity and solvency, accurately reporting and appropriately classifying cash flows are vital, especially for attracting investors or financiers. Internally, your cash flow statement is a good indicator of your ability to cover upcoming expenses, such as rents and employee salaries. Many businesses, unfortunately, end up with inaccurate cash flow statements due to basic accounting errors. Such inaccuracies, therefore, may throw off investors, get your loans denied, or make you spend cash you do not actually have.

Financial reporting standards for sound business financial analysis

Accurate preparation of financial reports is important to internal and external stakeholders and decision makers. While financial reporting may be indispensable as a self-monitoring tool within your company, your financial statements should comply with mandatory legal standards. In Singapore, for example, these legal standards are generally governed by the Singapore Financial Reporting Standard (SFRS), based on the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board.

As enterprises around the world cross more international borders and as business owners take on overlapping markets, the demand for more sophisticated methods of business financial analysis also tends to increase. This raises accounting standards all over the world to ensure the transparent, seamless, and optimal function of global markets.

Compliance with these standards not only means you avoid any legal sanctions. It also means that your financial statements are prepared using the same standards used by another business in your locality, or even a different country or continent. This allows you to evaluate how your business is doing in comparison with other companies like yours.

Challenges of creating financial statements for small businesses

With limited financial and human resources, small business owners usually end up exhausting an equally important yet also limited resource: time. Whether you’re doing the financial reports yourself or paying someone to do it, you may encounter several challenges that could cost you money or waste time you could have spent on other aspects of growing your business.

  • Limited human resource pool: Assuming that you can afford to hire or outsource your business’ financial functions, finding the best people with the skills and experience to suit your needs can still be challenging. On top of this, businesses that produce their own financial reports manually end up exhausting their already limited labor resources even more.
  • Legal constraints: Along with the constantly evolving business landscape comes constantly changing compliance standards. Even the slightest changes or additions to these requirements may oblige you to change internal processes, which is often time-consuming and resource-draining.
  • Human error: Even the slightest data entry inaccuracies or technical glitches can bring huge losses to your company, compromise your access to financing, or worse, damage your financial integrity. The culprit? Look no further than the traditional, standard data management tool that most business owners still insist on using: manually processed spreadsheets.

Manually processing your financial reports and statements through spreadsheets can cost you a lot of wasted time, money, and human talent. The tiniest errors in formulas can mess up an entire report, while the mind-numbing task of manually entering data and formulas eats up hours of human labor. If you have multiple people working on your financial statements, even the smallest inconsistency among different versions of files and templates may lead to duplicated efforts, wasted time, and possibly even more reporting mistakes.

Manual data processing also leads to delays in accessing information that may be important in making time-sensitive decisions or purchases. It also means that you or your staff will sometimes have to rush work to meet deadlines, which increases the possibility of making costly mistakes that lead to wrong decisions.

With the right mindset, skills, and tools, however, you can overcome these challenges. Take note of the following steps:

1. Consider the time you spend on financial reporting as investments

While it may seem counterproductive to devote time and financial resources to preparing financial statements, it actually helps your business run more efficiently. It saves you time and money while protecting you from potential legal repercussions of inaccurate or substandard reporting.

2. Streamline your processes to ensure that your data is always up to date

Develop a system that includes contingency measures in case of staff turnover or changing compliance requirements. However, keep in mind that there is no one-size-fits-all approach to this.

3. Equip yourself with tools that work for you

You don’t need to be a slave to Excel forever. Contrary to misconceptions, small and large businesses can benefit from technology solutions that keep up with the demands of increasingly competitive markets while keeping in sync with compliance requirements.

What you need: financial reporting in the cloud

Cloud-based enterprise resource planning (ERP) solutions can automate and standardize your financial reporting, both for internal and external purposes. A good cloud-based ERP solution allows you to:

1. Allocate time and resources more efficiently

Most people would rather do something else than manually crunch numbers. With an automated reporting system, you spend less time figuring out the nitty-gritty details and technicalities of accounting, thus freeing up time and resources.

2. Make accurate and informed decisions

By standardizing all your reports and consolidating your data in a cloud-based system, an efficient ERP solution eliminates duplicate work and spares you from the tedious task of reconciling inaccuracies or correcting mistakes. Automation also makes the information you need more readily available, making it easier for you to make time-sensitive decisions.

3. Be more in control of your business

Having an accurate picture of your company’s financial health also empowers you to objectively strategize, forecast, and plan your finances. You can get a better grasp of how your business is doing through an accounting software that works along with standard spreadsheets and allows flexible comparison and analysis of financial data using various parameters.

Financial reporting is, indeed, an indispensable task to keep your business running. This, however, doesn’t mean that you need to spend more time, energy, or money than necessary. Through a comprehensive and integrated financial management solution, you can generate accurate, timely, and compliant financial reports that provide you with more returns in the long run.

Find out how SAP Business One can help you stay on top of generating your financial reports through cloud-based, automated, comprehensive financial management solutions.

Follow SAP Finance online: @SAPFinance (Twitter)  | LinkedIn | FacebookYouTube

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Erwan Philippe

About Erwan Philippe

Erwan Philippe is the head of SAP Business One Asia Pacific Japan, which also includes Greater China. Working in the APJ region for over 15 years, his career spans over 13 years in the IT sector, which includes various leadership positions in sales, business development, and operations. Today, Erwan is responsible for driving sales, operations, expansion, and growth of SAP Business One across Asia.

Innovation Without Boundaries: Why The Cloud Matters

Michael Haws

Is it possible to innovate without boundaries?

Of course – if you are using the cloud. An actual cloud doesn’t have any boundaries. It’s fluid. But more important, it can provide the much-needed precipitation that brings nature to life. So it is with cloud technology – but it’s your ideas that can grow and transform your business.USA --- Clouds, Heaven --- Image by © Ocean/Corbis

Running your business in the cloud is no longer just a consideration during a typical use-case exercise. Business executives are now faced with making decisions on solutions that go beyond previous limitations with cloud computing. Selecting the latest tools to address a business process gap is now less about features and more about functionality.

It doesn’t matter whether your organization is experienced with cloud solutions or new to the concept. Cloud technology is quickly becoming a core part of addressing the needs of a growing business.

5 considerations when planning your journey to the cloud

How can your organization define its successful path to the cloud? Here are five things you should consider when investigating whether a move to the cloud is right for you.

1. Understanding the cloud is great, but putting it into action is another thing.

For most CIOs, putting a cloud strategy on paper is new territory. Cloud computing is taking on new realms: Pure managed services to software-as-a-service (SaaS). Just as legacy computing had different flavors, so does cloud technology.

2. There is more than one way to innovate in the cloud.

Alignment with an open cloud reference architecture can help your CIO deliver on the promises of the cloud while using a stair-step approach to cloud adoption – from on-premise to hybrid to full cloud computing. Some companies find their own path by constantly reevaluating their needs and shifting their focus when necessary – making the move from running a data center to delivering real value to stakeholders, for example.

3. The cloud can help accelerate processes and lower cost.

By recognizing unprecedented growth, your organization can embark on a path to significant transformation that powers greater agility and competitiveness. Choose a solution set that best meets your needs, and implement and support it moving forward. By leveraging the cloud to support the chosen solution, ongoing maintenance, training, and system issues becomes the cloud provider’s responsibility. And for you, this offers the freedom to focus on the core business.

4. You can lock down your infrastructure and ensure more efficient processes.

Do you use a traditional reporting engine against a large relational database to generate a sequential batched report to close your books at quarter’s end? If so, you’re not alone. Sure, a new solution with new technology may be an obvious improvement. But how valuable to your board will you become when you reduce the financial closing process by 1–3 days? That’s the beauty of the cloud: You can accelerate the deployment of your chosen solution and realize ROI quickly – even before the next full reporting period.

5. The cloud opens the door to new opportunity in a secure environment.

For many companies, moving to the cloud may seem impossible due to the time and effort needed to train workers and hire resources with the right skill sets. Plus, if you are a startup in a rural location, it may not be as easy to attract the right talent as it is for your Silicon Valley counterparts. The cloud allows your business to secure your infrastructure as well as recruit and onboard those hard-to-find resources by applying a managed services contract to run your cloud model

The cloud means many things to different people. What’s your path?

With SAP HANA Enterprise Cloud service, you can navigate the best path to building, running, and operating your own cloud when running critical business processes. Find out how SAP HANA Enterprise Cloud can deliver the speed and resources necessary to quickly validate and realize solid ROI.

Check out the video below or visit us at www.sap.com/services-support/svc/in-memory-computing/hana-consulting/enterprise-cloud-services/index.html.

Connect with us on Twitter: @SAPServices

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Michael Haws

About Michael Haws

Michael Haws is the Vice President of HANA Enterprise Cloud at SAP. His specialties include Enterprise Resource Planning Software & Services, Onshore, Nearshore, Offshore–Application, Infrastructure and Business Process Outsourcing.

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Consumers And Providers: Two Halves Of The Hybrid Cloud Equation

Marty McCormick

Long gone are the days of CIOs and IT managers freely spending money to move their 02 Jun 2012 --- Young creatives having lunch and conversation. --- Image by © Hero/Corbisexisting systems to the cloud without any real business justification just to be part of the latest hype. As cloud deployments are becoming more prevalent, IT leaders are now tasked with proving the tangible benefits of adopting a cloud strategy from an operational, efficiency, and cost perspective. At the same time, they must balance their end users’ increasing demand for access to more data from an ever-expanding list of public cloud sources.

Lately, public cloud systems have become part of IT landscapes both in the form of multi-tenant systems, such as software-as-a-service (SaaS) offerings and data consumption applications such as Twitter. Along with the integration of applications and data outside of the corporate domain, new architectures have been spawned, requiring real-time and seamless integration points.  As shown in the figure below, these hybrid clouds – loosely defined as the integration of data from systems in both public and private clouds in a unified fashion – are the foundation of this new IT architecture.

hybridCloudImage

Not only has the hybrid cloud changed a company’s approach to deploying new software, but it has also changed the way software is developed and sold from a provider’s perspective.

The provider perspective: Unifying development and operations

Thanks to the hybrid cloud approach, system administrators and developers are sitting side by side in an agile development model known as Development and Operations (DevOps). By increasing collaboration, communication, innovation, and problem resolution, development teams can closely collaborate with system administrators and provide a continuous feedback loop of both sides of the agile methodology.

For example, operations teams can provide feedback on reported software bugs, software support issues, and new feature requests to development teams in real time. Likewise, development teams develop and test new applications with support and maintainability as a key pillar in design.
After seeing the advantages realized by cloud providers that have embraced this approach long ago, other companies that have traditionally separated these two areas are now adopting the DevOps model.

The consumer perspective: Moving to the cloud on its own terms

From the standpoint of the corporate consumer, hybrid cloud deployments bring a number of advantages to an IT organization. Specifically, the hybrid approach allows companies to move some application functionality to the cloud at their own pace.
Many applications naturally lend themselves to public cloud domains given their application and data requirements. For most companies, HR, indirect procurement, travel, and CRM systems are the first to be deployed in a public cloud. This approach eliminates the requirement for building and operating these applications in house while allowing IT areas to take advantage of new features and technologies much faster.

However, there is one challenge consumers need to overcome: The lack of capabilities needed to extend these applications and meet business requirements when the standard offering is often insufficient. Unfortunately, this tempts organizations to create extensive custom applications that replicate information across a variety of systems to meet end user requirements. This development work can offset the cost benefits of the initial cloud application, especially when you consider the upgrades and support required to maintain the application.

What this all means to everyone involved in the hybrid cloud

Given these two perspectives, on-premise software providers are transforming themselves so they can meet the ever-evolving demands of today’s information consumer. In particular, they are preparing for these unique challenges facing customers and creating a smooth journey to a hybrid cloud.

Take SAP, for example. By adopting a DevOps model to break down a huge internal barrier and allowing tighter collaboration, the company has delivered a simpler approach to hybrid cloud deployments through the SAP HANA Cloud Platform for extending applications and SAP HANA Enterprise Cloud for hosting solutions.

Find out how these two innovations can help you implement a robust and secure hybrid cloud solution:
SAP HANA Cloud Platform
SAP HANA Enterprise Cloud

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Marty McCormick

About Marty McCormick

Marty McCormick is the Lead Technical Architect, Managed Cloud Delivery, at SAP. He is experienced in a wide range of SAP solutions, including SAP Netweaver SAP Portal, SAP CRM, SAP SRM, SAP MDM, SAP BI, and SAP ERP.

Human Skills for the Digital Future

Dan Wellers and Kai Goerlich

Technology Evolves.
So Must We.


Technology replacing human effort is as old as the first stone axe, and so is the disruption it creates.
Thanks to deep learning and other advances in AI, machine learning is catching up to the human mind faster than expected.
How do we maintain our value in a world in which AI can perform many high-value tasks?


Uniquely Human Abilities

AI is excellent at automating routine knowledge work and generating new insights from existing data — but humans know what they don’t know.

We’re driven to explore, try new and risky things, and make a difference.
 
 
 
We deduce the existence of information we don’t yet know about.
 
 
 
We imagine radical new business models, products, and opportunities.
 
 
 
We have creativity, imagination, humor, ethics, persistence, and critical thinking.


There’s Nothing Soft About “Soft Skills”

To stay ahead of AI in an increasingly automated world, we need to start cultivating our most human abilities on a societal level. There’s nothing soft about these skills, and we can’t afford to leave them to chance.

We must revamp how and what we teach to nurture the critical skills of passion, curiosity, imagination, creativity, critical thinking, and persistence. In the era of AI, no one will be able to thrive without these abilities, and most people will need help acquiring and improving them.

Anything artificial intelligence does has to fit into a human-centered value system that takes our unique abilities into account. While we help AI get more powerful, we need to get better at being human.


Download the executive brief Human Skills for the Digital Future.


Read the full article The Human Factor in an AI Future.


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Dan Wellers

About Dan Wellers

Dan Wellers is founder and leader of Digital Futures at SAP, a strategic insights and thought leadership discipline that explores how digital technologies drive exponential change in business and society.

Kai Goerlich

About Kai Goerlich

Kai Goerlich is the Chief Futurist at SAP Innovation Center network His specialties include Competitive Intelligence, Market Intelligence, Corporate Foresight, Trends, Futuring and ideation.

Share your thoughts with Kai on Twitter @KaiGoe.heif Futu

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Finance And HR: Friends Or Foes? Shifting To A Collaborative Mindset

Richard McLean

Part 1 in the 3-part “Finance and HR Collaboration” series

In my last blog, I challenged you to think of collaboration as the next killer app, citing a recent study by Oxford Economics sponsored by SAP. The study clearly explains how corporate performance improves when finance actively engages in collaboration with other business functions.

As a case in point, consider finance and HR. Both are being called on to work more collaboratively with each other – and the broader business – to help achieve a shared vision for the company. In most organizations, both have undergone a transformation to extend beyond operational tasks and adopt a more strategic focus, opening the door to more collaboration. As such, both have assumed three very important roles in the company – business partner, change agent, and steward. In this post, I’ll illustrate how collaboration can enable HR and finance to be more effective business partners.

Making the transition to focus on broader business objectives

My colleague Renata Janini Dohmen, senior vice president of HR for SAP Asia Pacific Japan, credits a changing mindset for both finance and HR as key to enabling the transition away from our traditional roles to be more collaborative. She says, “For a long time, people in HR and finance were seen as opponents. HR was focused on employees and how to motivate, encourage, and cheer on the workforce. Finance looked at the numbers and was a lot more cautious and possibly more skeptical in terms of making an investment. Today, both areas have made the transition to take on a more holistic perspective. We are pursuing strategies and approaching decisions based on what delivers the best return on investment for the company’s assets, whether those assets are monetary or non-monetary. This mindset shift plays a key role in how finance and HR execute the strategic imperatives of the company,” she notes.

Viewing joint decisions from a completely different lens

I agree with Renata. This mindset change has certainly impacted the way I make decisions. If I’m just focused on controlling costs and assessing expenditures, I’ll evaluate programs and ideas quite differently than if I’m thinking about the big picture.

For example, there’s an HR manager in our organization who runs Compensation and Benefits. She approaches me regularly with great ideas. But those ideas cost money. In the past, I was probably more inclined to look at those conversations from a tactical perspective. It was easy for me to simply say, “No, we can’t afford it.”

Now I look at her ideas from a more strategic perspective. I think, “What do we want our culture to be in the years ahead? Are the benefits packages she is proposing perhaps the right ones to get us there? Are they family friendly? Are they relevant for people in today’s world? Will they make us an employer of choice?” I quite enjoy the rich conversations we have about the impact of compensation and benefits design on the culture we want to create. Now, I see our relationship as much more collaborative and jointly invested in attracting and retaining the best people who will ultimately deliver on the company strategy. It’s a completely different lens.

Defining how finance and HR align to the company strategy

Renata and I believe that greater collaboration between finance and HR is a critical success factor. How can your organization achieve this shift? “Once the organization has clearly defined what role finance and HR must play and how they fundamentally align to the company strategy, then it’s more natural to structure them in a way to support such transformation,” Renata explains.

Technology plays an important role in our ability to successfully collaborate. Looking back, finance and HR were heavily focused on our own operational areas because everything we did tended to consume more time – just keeping the lights on and taking care of our basic responsibilities. Now, through a more efficient operating model with shared services, standard operating procedures, and automation, we can both be more business-focused and integrated. As a result, we’re able to collaborate in more meaningful ways to have a positive impact on business outcomes.

In our next blog, we’ll look at how finance and HR can work together as agents of change.

For a deeper dive, download the Oxford Economics study sponsored by SAP.

Follow SAP Finance online: @SAPFinance (Twitter)LinkedIn | FacebookYouTube

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Richard McLean

About Richard McLean

Richard McLean, regional CFO for SAP Asia Pacific Japan, oversees all key finance and administrative functions for field and regional headquarters, supporting more than 16,000 employees. He has more than 20 years of experience in senior finance roles with leading global companies across a range of industries, including financial services, investment banking, automotive, and IT. He joined SAP in 2008.