Making time to look over your financial reports each month is an important task for any business owner. If you are not taking the time to do this, either because you’re too busy, or perhaps you don’t really understand what you’re looking at and it doesn’t make sense to you, then here are 6 reasons we recommend that you should start to.
But before we get our 6 reasons, let’s talk very quickly about which reports to look at. At a bare minimum, and depending on the complexity of your business, you should be looking at the following:
Profit and Loss Report – also known as the P & L or the Income Statement – tells you, as the name suggests, how your business is performing over a period of time, such as a month or a financial year. In broad terms it shows the revenue that your business has generated, less the expenses for that same period. In other words, it shows how profitable your business is.
Cashflow Report – It’s really important to run this alongside the P & L. Often a business can tell one story on the profit and loss and a different one on the cashflow. It not only shows you what is actually coming in but where you are spending your money.
Balance Sheet – shows the value of the business’s Assets, Liabilities and Equity. Gives you a basic indiciation of the value of your business
Assets include things like money in bank accounts, Plant and Equipment, Accounts Receivable balances
Liabilities include things like Bank loans and credit cards, Accounts Payable, and Hire Purchase balances, Shareholder Current Accounts and Tax outstanding
Equity is the difference between your Assets and your Liabilities and includes Retained Earnings and Share Capital
Accounts Receivable Ageing report (Aged Receivables) – this shows how much money is still owed to the business as at a certain date in time, and is usually segmented as to how overdue they are, or sometimes by how far past the invoice date they are. Generally, you will have Current, 30, 60 and 90 days columns.
Accounts Payable Ageing Report (Aged Payables) – this report shows who the business owes money to as at a certain date in time and, like the Accounts Receivable Ageing report, is usually segmented by overdue period.
So why bother?
Better understanding of your tax due – The best thing for clients is to understand what money is theirs and what money is to be saved. By reviewing the profit and loss report each month they can calculate the amount of tax they should be sitting aside. It’s good to feel comfortable you won’t have any surprises and penalties for being short!
Understand your business better – by looking at your Profit and Loss report monthly you will get a good picture of how your business is performing month by month and it will give you a better understanding of what makes up your profit. It can be helpful to compare periods, or to look at a month by month P&L. The best thing I want our clients to ask is WHY? Take the time to understand why something changed month to month or you didn’t hit your budget. It’s easy to just carry on but simply asking why can change a business completely.
Accurate information for lending purposes – Right now this is a hot topic. If you are applying for a loan or an overdraft, the bank or financial institution will look closely at both your Profit and Loss report and the Balance Sheet as a lot can be learned about a business by looking at these reports together. If you are unsure what some of your balances are in your accounts, get in touch and we can explain them further.
Get paid quicker and reduce bad debts – by looking at your Accounts Receivable Aged Summary each month you can follow up with overdue accounts promptly which often results in getting paid quicker. The longer an overdue amount is left unpaid the higher the risk of it not being paid at all, so it is important to keep on top of this. Don’t be afraid to make a call or check in! I always tell myself in this situation it’s either be nice or feed your kids. It helps make that call!
Better relationships with your suppliers – Assuming you are entering your supplier bills into your accounting software (recommended for most businesses to get an accurate profitability figure and it’s easier to now using Hubdoc!) your Aged Payables report will alert you to any unpaid or overdue amounts. Supplier relationships are an important aspect of your business and paying on time is crucial to maintaining those relationships.
Better cashflow – having an accurate understanding of how much money the business is owed, and how much money the business owes, can help with cashflow planning to ensure that there is enough money when needed. Additionally, understanding the trends of your business, its profitability drivers, its expenses, etc., can help to plan sales and marketing campaigns so that the revenue keeps coming in.
Better business decision making – Your financial reports tell the story of your business and it’s important that you understand the story that they are telling you. The better you understand what’s going on in your business the stronger position you will be in to make better business decisions that affect the profitability of your business and its financial viability. If you are taking on a staff member or expanding you need to know your margins and profatibility before making that decision! These reports will tell you this and could potentially save you lots of money.
If you would like to know which reports are relevant to your business, and you want to better understand what’s going on in your business , then get in touch so we can make a time to go through them with you.
Your business success is important to us and we are here to help you.