What is financial reporting? 8 must-measure metrics for small businesses

Financial reporting is a crucial part of any business. After all, you need to know how and when money leaves and enters your business to determine how successful you are. You need the right financial information to make sure you can cover your expenses and manage your business effectively.

This guide will cover:

• What financial reporting is
• Why financial reporting is important
• The eight must-measure metrics for small businesses
• How Countingup can help your financial reporting

Financial reporting is when you record financial information about your business that indicates how your company performs over a specific time period. The documents you use to record this data are called financial statements. 

The main financial statements every business uses are the balance sheet, income statement (also known as the profit and loss statement) and cash flow statement. 

Financial reporting is crucial to running a business since it helps you make decisions about its future. It also enables you to determine if your management style is effective. If you’re making a profit, you’re probably doing something right. On the flip side, if you’re losing money, you might need to look into ways of improving your operations.

Additionally, financial reporting also helps you make sure you pay the correct taxes and provide the correct reports to HMRCs, debt holders, investors, and other key stakeholders. 

Financial reports give valuable information to potential investors or creditors about the business’ financial stability to give them an idea of whether your company is a savvy investment. Having access to the right information will help them make an informed decision on investing in your business or lending you money.

There are several metrics you should include in your financial reporting. Most businesses measure these metrics either monthly, quarterly, or annually. If your business is new and growing, you might choose to calculate them more often. You report these metrics to HMRC at the end of every tax year on your Self Assessment tax return.

We’ve listed eight must-measure ones below along with the formula to calculate each one:

Your gross profit margin is a figure that measures the percentage of revenue (money made from sales) you have left after deducting your Cost of Sales. Your Cost of Sales refers to the money you have to spend to produce the goods or services you sell, not including taxes, operating expenses or interest.

Gross profit margin measures your profitability; in other words, how successful your business is. 

Gross profit margin = (Revenue – Cost of Sales) ÷ Revenue x 100

This profitability metric measures how much money you have left after subtracting all your business costs, including Cost of Sales, operating expenses, interest and taxes. Unlike gross profit margin, which only measures how much money you get back for each £1 you spend on production, net profit margin measures your business’ overall profitability.

Net profit margin = Net profit ÷ Revenue x 100

Working capital measures your company’s available operating liquidity, meaning how much cash and valuable items you have that can be used to fund day-to-day operations. You calculate your working capital by subtracting your liabilities (bills, taxes, debts and other financial obligations) from your assets (valuable items you can turn into cash). 

Working capital = Current assets – Current liabilities

Operating cash flow measures how much cash your business has from running its daily operations. If the number is positive, it means you have enough cash to run and grow your business. If the number is negative, it means you don’t have enough money and may need financial backing to continue operating. 

Calculating operating cash flow can be done using the direct or indirect method. The indirect method uses net income (money you have after paying your taxes and other financial obligations) as the base. You make adjustments as needed by adding or subtracting different items to create the cash flow statement.

Operating cash flow = Operating income + Depreciation – Taxes + Change in working capital. 

However, small businesses mostly use the direct method since it’s easier to calculate and still gives you the information you need. The direct method only accounts for cash transactions to create the cash flow statement, and is as follows:

Operating cash flow = Net income + Non-cash expenses – Increase in working capital

• Operating income is money you make from running your daily operations.
• Change or increase in working capital refers to your company having more or less current assets compared to an earlier time.
• Non-cash expenses are expenses that don’t involve a cash payment, such a depreciation.
• Depreciation refers to how assets lose value over time.

Debt-to-equity measures how much your company finances itself using equity (company value) versus debt. This ratio gives you insight into whether your company would be able to cover all its debts in the event of a business turndown. In other words, can you bail yourself out if things go south?

Debt to equity ratio = Total debt ÷ Total equity

This is a ratio that demonstrates a business’ efficiency by measuring how many times per accounting period you sell your entire inventory. Inventory turnover gives you insight into whether your business has too much inventory in relation to how many products or services you sell. 

Inventory turnover = Cost of Sales ÷ (Beginning inventory + Ending inventory ÷ 2)

Your beginning inventory is the ending inventory of the last period. This means your ending inventory becomes the ending inventory for the next period. Learn more about inventory management.

Total asset turnover measures how effectively a business uses its assets to generate revenue. In other words, how well do you use your equipment or tools to sell your products or services? The higher the total asset turnover number, the more effectively you use your assets.

Total asset turnover = Revenue ÷ (Beginning total assets + Ending total assets ÷ 2)

Return on assets (or ROA) is a profitability ratio that measures how well your business manages its available resources and assets to earn higher profits. You calculate your ROA by dividing your net profit (money you have left after deducting all your expenses, taxes and debts) by the company’s average assets. 

Return on assets = Net Profit ÷ (Beginning total assets + Ending total assets ÷ 2)

There you have it. Financial reporting may seem daunting, but if you break it down, most metrics are fairly straightforward. However, if you feel like financial reporting is too complicated or time-consuming, you can hire a professional accountant to help out. You can either have them look at the financial statements you put together or manage all your financial reports.

Countingup is the business current account and accounting software in one app. Thousands of business owners across the UK are using it to automate their financial admin and save time and stress around bookkeeping.

You’ll receive real-time insights into your business finances, profit and loss reports, tax estimates, and the ability to create and send invoices in seconds. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward!

Find out more here.