11 Accounting Details To Look For in Small Business Financial

11 Accounting Details To Look For in Small Business Financial

By: Corey Philip
Updated: December 2, 2019

A growing business makes happy business owners—but getting it to flourish isn’t always easy. Sometimes, we’re so busy with our marketing strategies and putting together a great team that we forget all about the numbers. If you want your company to survive and achieve its goals, you should always stay on top of accounting for one important reason.

It can help proprietors, investors, financial supervisors, and other shareholders check and see the financial performance of the company they are handling so they can make the right decisions.

Whether you own a small or big business, you should be aware of your business's accounting. This can include:

  • Cost and earnings of your business
  • Financial documents and statements
  • Company income
  • Cash flow
  • Accounts receivable and payable
  • Profits and liabilities
  • Assets
  • And more

Learning about the accounting details of your business is fundamental for expansion, so you need to record all of the company's transactions with accurate details to avoid problems with the financial statements in the future. With these accounting details, business owners like you can determine how well the business is doing, and decide on what strategy to take to improve. 

The Bottom line

Small businesses shouldn’t ignore managing their business's financial reports, while big businesses need to keep track of everything going on with the money they have to prevent loss of income.

How Mergers Can Help Achieve Financial Growth

So what about the accounting details of two small businesses that merge together? 

First off, merging with another company definitely has its own advantages, like producing a lot of chances to increase the market's sales and expand the business. It is easier to fulfill the consumer's needs with the help of a merger. Furthermore, two companies will get the benefit of leadership from the personnel and the income shares. They may join forces for a lot of reasons, but their main point is to help their own company achieve financial growth.

Unfortunately, mergers sometimes fail to achieve this goal. Why? Because they did not look into the business financials of each business!

To understand the overall performance of both companies in a merger, accounting details should never be overlooked. Through this, you know if you can profit from a merger, or if it can get you bankrupt. If you don’t have any idea as to what financial details you need to look into before merging with another company, read on!

Financial Details

The financial details of your company can show you its financial health. These pieces of information allow business owners to analyze the performance of the company, determine if the budgeted plan is doing well or not, and can help ensure the accuracy of the company's tax, investments, and financing details. Investors, financial analysts, and companies involved in a merger rely on this data to make predictions about the company's future performance.

Here’s a quick overview of what these financial details are:

Financial Statements

When evaluating a merger's financial data, the first step is to obtain the aim company's financial statements. During the discussion of a merger, both parties can sign a non-disclosure agreement and exchange financials.

Financial Statements are the compilation of summary-level records about the business's financial status and cash flows. It's the main source of financial information for business owners. You can use these to determine the ability of the company you are merging with to produce cash. With this information, you also know whether the business can pay back its debts and liabilities. In addition, you can examine the details of specific transactions and track profitability issues easily. 

Income Statement

An income statement shows the financial profitability of a business, the profit and loss statement, and the company's current momentum for a stated period. It is one of the most necessary records from the accounting documents because it shows the net profit and loss result. From this document, you can see the company's revenues, liabilities, profits, and losses that happened throughout a year, semester, or any period. On the other hand, the expenses reflect the company's capability of managing their resources.

You can combine the income statements of both companies involved in a merger to know how profitable combining the two will be.

Balance Sheet

The Balance Sheet displays the company's total assets, net worth, and financial position at a specific point in time. It presents a source for computing rates of return and evaluating its capital structure.

With two sides or sections, it’s easy enough to understand for any business owner. The left side is for the company's assets, and the right side is for the company's liabilities and stakeholder's equity. In the balance sheet, the cash or capital is the first asset that appears on the first line. All of the accounts receivable are also indicated in the balance sheet for the owners to know all the company's sales revenue.

Cash Flow Statement

The cash flow statement provides the total data concerning all cash inflows and outflows that a company receives and pays. It’s very useful in business mergers as it helps give insight into all the transactions that go through the business.

This document is separated into three business activities: operations, investing, and financing. If you want to analyze the cash flow of the merged companies, you can do it by summing both the company's statements together. This way, you can easily examine how money flows through each company.

Accounts Receivable Aging

Accounts receivable aging is a periodic report for all the list of overdue customer invoices and remaining credit memos by date range. It informs you how great a company is doing on the collections side, while also determining the remaining allowance of any doubtful accounts that the company has. You can estimate the amount of debt and write-off with the use of accounts receivable aging.

At a glance, it’s a great way of getting to know the other company’s customers. By digging into Accounts Receivable Aging, you will know whether the company should keep doing business with a customer or not as it shows which customers are becoming credit risks, which are chronically late payers, or which ones pay on time.

Accounts Payable Aging

From the name itself, the Account Payable Aging or A/P aging is the opposite of Accounts Receivable Aging. The reports generated are sometimes used by a company's outside auditors to know the list of payables that are overdue as of the end of the period being reviewed, and it can help you, too. Through this, you know who you need to pay, how much you owe them, and what the due dates are if you push through with the merger.

Make sure this accounting document is updated though, or else it will be useless. To find out, see if the result matches the ending accounts payable balance in the general ledger. If it doesn’t, then it isn’t updated!

Revenue by Customer

If you can identify which customers owe you money, you should also know the ones that bring in the most money to the business.

The revenue by customers or customer profitability is a part of an accounting document that tells you how much was made from each customer over a period of time. It is usually calculated by taking the overall revenue and dividing it by the total number of users. If you want your business merger to bring in more money, try to have a great relationship with the most profitable clients. But that doesn’t mean you should forget the others—always grow your number of customers. Doing both can turn into a healthy income stream. 

Owner Benefit

The Owner Benefit is like the wages a business owner pays himself for the work they have done for their business. It also includes the owner's health insurance, personal expenses through the company, and more.

If the business is a sole proprietorship, there should be no salary. Although you need to consider yourself, especially if you have a family, you still need to have enough self-discipline not to allocate too much money to your salary, as this habit is bad for business. If your company is merged with another, the other party needs to know how much you take from the business you are both handling.

Sustainability of Revenue Stream

You need a sustainable stream of revenue, or your businesses will be down within just a few months from the moment you merged. This data can tell you how high revenues can grow at a set margin before your merger.

The more you grow your income revenue, the more likely you are to increase your profits. But if your business continues to rise faster than sustainable revenue, the resources needed to finance this growth will run out. On the other hand, if your revenue gets more passive than the sustainable revenue limit, it will not be a problem. Thus, it will store resources that can later be provided for higher sustainable revenue growth.

Changes in Common Size Analysis

A common size income statement, or vertical analysis, is a financial statement in which each of the data is displayed as a percentage of the value of revenue or sales. The Income statement items are declared as a percent of net sales, and the balance sheet items are stated as a percent of total assets, or total liabilities and shareholders' equity. The common-size analysis allows the evaluation of reports from one time to the next within a business and between competing companies.

Because it is expressed in percentages, the statement data is easily comparable. Changes between these percentages from year to year let you evaluate trends within a company, answering the question of whether or not the business is performing well.

Handling of Accounts Receivable / Unearned Revenue

Accounts receivable happens when a client does not pay immediately after purchasing a product. If the amount increases over time, it will lead to greater cash flow pressures. That is why it is necessary to observe and obtain the receivable amount on time to prevent problems from arising.
On the other side, unearned revenue is when you have received the payment, but the service has not yet been performed. It is recognized as a liability on the balance sheet of accounting business due to the basis that it has an obligation to the customer to provide a service.

It can be difficult for a small business to handle accounts receivable and unearned revenues. Knowing how the other company handles these two can show you if merging will only create more liabilities than assets for your own business.

In Conclusion

Accounting is nothing but the language of business. Playing an essential role in supporting all forms of financial activities, you’ll have all the information you need for you to succeed. If you know all the significant details about the financial details of the company you are merging with, it will be easier for you to manage. Without this, you won't even know how the business works!

Corey Philip
December 2, 2019
Corey Philip

Founder of a home service / specialty trade contracting company (think patio's and deck) with a focus on customer experience. Quantitative investor. Data driven marketer. Runner.