Setting up and maintaining a successful company requires business savvy, management skills, and a firm understanding of your financial landscape. The last of these skills, effective bookkeeping, can make or break small businesses, including those with limited liability companies (LLCs).
In this guide, we’ll examine the why behind financial reporting for your LLC and discuss the types of financial statements you will encounter, best practices, common pitfalls, and additional advice for small business owners. 🎉
Key Financial Reports Every LLC Should Keep
If you currently have an LLC or are in the process of setting one up, familiarize yourself with the types of reports you’ll need for your business:
Income Statement (Profit and Loss Statement)
Income statements, also known as Profit and Loss statements, are used to track your business revenue, expenses, and profitability over time. Your income statement is one of the first places you can go to identify common themes and financial trends for your business. Identifying these trends in your net income statement will inform your decision-making strategies and protect your bottom line. 🤑
Balance Sheet
Your business’s balance sheet allows you to see your broader financial position and net worth, offering a big-picture view. Like individuals, the net worth of a business is not only determined by its revenue month-over-month or year-over-year but also by its other investments, debts, and depreciation. A balance sheet will display your LLC’s assets, liabilities, and equity during a specific period. ⚖️
Cash Flow Statement
A cash flow statement is a detailed record of your LLC’s cash inflow and outflow. According to a study by Jessie Hagan with U.S. Bank, 82% of businesses fail due to poor cash flow management.
Understanding your business’s cash flow statement helps you maintain liquidity. Liquidity is a business’s ability to convert assets into cash to fulfill short-term business obligations, such as paying debt and bills. 🫡
Accounts Receivable and Accounts Payable Reports
These two types of financial statements are two sides of the same coin, and both are essential to understanding your cash flow, assets, and liabilities. Larger companies often have dedicated departments for each. 🧐
Accounts Receivable
Accounts receivable is the money owed to you and your LLC from customers, in exchange for the goods or services you provide. Accounts receivable is considered an asset since it is money your business has made, although not yet received.
An accounts receivable aging report provides an in-depth view of a company’s open invoices, tracking overdue payments and the speed at which clients complete payments. This detailed data on client payment trends helps you evaluate client risk and project potential financial losses. Strategic knowledge like this improves cash flow and allows you to maintain liquidity.
Accounts Payable
Conversely, accounts payable is the money your business owes to others, such as creditors, contractors, and suppliers. It’s considered a liability.
An accounts payable aging report keeps track of your outgoing payments and bills, categorizing them so your business stays organized and avoids fees for late payments. This report is a useful reference when communicating with future lenders on credit amounts, interest rates, repayment timelines, and other investing activities. 💵
Budget vs. Actual Report
Just like you need a personal budget, you should also create a planned budget for your LLC. You can base estimates for expenses and revenue on past spending and earnings. Planned budgets help you strategize for future periods and specific events.
Also like a personal budget, your organizational budget is eventually compared to your company’s actual financial performance. While comparing these two documents side by side, you can identify areas of overspending, underperformance, or unexpected net profit. 📈
Tax Records and Supporting Documents
All businesses, including LLCs, are subject to tax laws and the organizations that enforce them. Businesses maintain an organized collection of tax documents, such as tax filings, receipts, and deductions.
How long should an LLC hold on to pertinent tax documents for past years? According to the IRS, “Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.” This is the generally recommended time frame, but there are some exceptions, which you can explore further on the IRS website. 📆
Industry-Specific Financial Reports (Optional)
In addition to the main types of financial reports outlined above, certain industries require specific types of financial reports:
Retail: In the retail industry, those in charge of financials use retail accounting techniques and reporting. These techniques help business owners estimate their current inventory and its value without constant manual inventory. Retailers may use special reports to track ongoing pricing discounts and sales. 👕
Manufacturing: Manufacturers also have certain variables they report and record, including inventory. Manufacturers must keep records of the cost of raw materials before they become finished goods, and many manufacturers experience significant operating expenses. 🏭
Technology: The tech landscape is complex and fast-paced, which requires organized accounting techniques and reporting. Tech companies must keep accurate reports when it comes to regulatory requirements and tax purposes. They keep specific financial records as well for potential mergers and acquisitions. 📱
Healthcare: Healthcare companies have different financial reporting depending on their type and status, such as nonprofit, for-profit, and government-run, as well as the specific types of services they provide. Healthcare providers must keep records on both insurance and patient payments and have a strict regulatory landscape. 🩺
Why Keeping Financial Reports Is Essential for Your LLC
Legal and Compliance Requirements
As discussed earlier, keeping accurate financial reports ensures you comply with federal and state regulations. Through your LLC, you have a degree of protection for your personal finances through its limited liability status. But this is only protected if you maintain clear reporting distinctions for your personal and business finances. 👩🏼⚖️
Supporting Tax Filings
Producing correct tax documentation is essential for your legal success as an LLC. You must maintain accurate records for your tax returns and deductions. If you’re ever audited, you’ll have the evidence to support a clean audit.
Informing Business Decisions
Data is a key tool you can use to grow your LLC. Financial data from key metrics allows you to streamline to improve your growth, profitability, and your business’s financial health.
Best Practices for Managing Your LLC’s Financial Reports
Follow these best practices as you develop and maintain your reports:
Use Digital Tools for Efficiency
Modern technology has made it easier than ever to maintain records for your LLC. For example, you can take advantage of cloud accounting software for managing reports. Depending on your subscription, you can manage records from multiple devices and accounts, create automation, analysis, and more. 🖥️
Set Up a Consistent Record-Keeping Schedule ⏰
To stay organized, you should create a schedule for your financial statements. Depending on your industry and business type, you’ll want to update reports on either a monthly or quarterly basis. The process for both starts by collecting your data and organizing it. This is usually followed by analysis, depending on your business objectives.
Maintain Backups of All Financial Records
The last thing you need as a small business owner is lost documentation. You must maintain a secure accounting environment and store both physical and digital copies of your reports (that you back up regularly).
Common Mistakes to Avoid with LLC Financial Reports
Avoid these common pitfalls in your financial reporting:
Failing to reconcile bank accounts regularly.
Neglecting to review financial reports before tax filings.
Not consulting a professional when handling complex finances.
If you do encounter any of these mistakes, it may be time to seek expert advice.
When to Seek Help From an Accountant or Financial Expert
Not sure if it’s time to seek professional financial help? 😵💫 Look out for these signs:
Signs Your LLC May Need an Accountant
Difficulty tracking your finances
Struggling to prepare for upcoming taxes
Trouble scaling business operations
Issues in managing payroll
Benefits of Hiring an Accountant for Your LLC
Although accounting services aren’t free, hiring a specialized accountant can save your small business both time and money in the long run. An accountant helps you make informed business decisions that will contribute to future growth and improved efficiency.
Find an Accountant Who Specializes in Small Businesses
When searching for an accountant, look for someone who specializes in small businesses and if possible, your industry:
How to Get Started
First, determine the financial areas you’re currently struggling in. Then, research accountants in your area and their specialties. You can even utilize tools that match you with an accountant based on your business needs. Try our free tool to connect with a small business accountant today! 😌
FAQs About Financial Reports for LLCs
What are the minimum financial reporting requirements for LLCs?
At a minimum, LLCs must submit an annual report in their registered state that contains the basic required information. LLCs must also file all necessary tax documents that apply to them.
How often should LLCs review their financial reports?
To preserve accuracy and find financial insights, LLCs should review their financial reports monthly.
Do I need special software to maintain financial records for my LLC?
It is generally encouraged to use a cloud-based accounting software to maintain your financial records, in addition to physical backups.
Relay is a financial technology company and is not an FDIC-insured bank. Banking services provided by Thread Bank, Member FDIC. FDIC deposit insurance covers the failure of an insured bank. Certain conditions must be satisfied for pass-through deposit insurance coverage to apply.
