Understanding the financial situation of your business and where it is tracking is about more than just knowing how much money is in the bank. In order to get an accurate understanding of where your business is at it is important to understand three core financial reports. These three reports are used to assess the financial performance and position of your business, but what do they tell you?
Profit & Loss Report
You may hear the Profit & Loss report also referred to as the Income Statement or the Statement of Financial Performance but whatever the name used they will all will tell you the same thing, which is the business revenue (income) and expenses during a particular period, whether that be for a month, quarter or the financial year.
The Profit & Loss report will show you the following:
Your Profit & Loss report can be used to calculate any KPI’s or industry metrics to help you run your business and when broken down further gives you figures such as gross profit and margins.
Your Balance Sheet is also known as your Statement of Financial Position. This is a snapshot as at a point in time as to what you own (the assets), less what you owe (the liabilities) to give you the current value of your business (owners’ equity).
The assets are both current and fixed and can include cash or bank balances, debtors (money owed to you), stock and fixed assets such as vehicles or fixtures.
The liabilities are all items that the business owes and include creditors (money you owe to suppliers), tax owed like GST or PAYE and any loans or credit cards that the business may have.
When you take the liabilities figure from the asset figure you are left with the owners’ equity. This is the total figure the business owes the owner.
I believe this is the most important report in your business. The old adage that cash is king is very much true when you are running your business. The cashflow statement simply shows you the movement of cash in and out of your business, again during a particular period. It tracks the movements of all cash in and out whether it be actual cash or cash equivalents (e.g. credit cards, EFTPOS accounts and bank accounts).
One of the most common questions we as bookkeepers get asked by business owners is “where did all the money go?” and the cashflow report will tell you exactly that. A healthy business will have more cash coming in than going out and your cashflow report will help you predict any upcoming shortfalls or identify trends that may relate to a particular time of year.
In summary, all three of these reports are vital to the successful running of your business. Ideally you will run these reports every month and sit down with you bookkeeper or accountant and review these at least quarterly. The more you use these reports, the more confident you will become in reading them. If you would like to have an obligation free chat about reports for your business, please get in touch today by giving us a call 04 232 9199 or fill out your details below and we will get in touch.