The Comprehensive Guide on How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, + Website

CHAPTER 27

SMALL BUSINESS FINANCIAL REPORTING

Identifying a Small Business

In the United States today there are, quite literally, millions of small businesses. Although there is no clear definition of what actually constitutes a small business, the following definition gives you a better idea of what the term small business refers to:

• Annual sales revenues under $50 million (with an average of closer to $5 to $20 million).
• Under 500 employees.
• Private ownership (not publicly traded).
• Limited number of shareholders (often under 10).
• Primarily structured as an LLC, subchapter S corporation, partnership, or sole proprietorship (pass-through entities).
• Limited need for audited financial statements with most obtaining reviewed financial statements or producing only internal financial statements.

In comparison, there are about 5,000 public companies whose stocks are traded on U.S. securities markets. And there are thousands of large private companies whose ownership shares are not traded in a public marketplace.

Regardless of size, all businesses need effective accounting systems for conducting operations, for complying with tax laws, and for providing essential financial information to their managers (especially profit or loss, financial condition, and cash flows). Then there is the fourth function of accounting—preparing the external financial reports of the business to its lenders and outside investors who don’t participate in managing the business.

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