How is your business going? No really, is it performing well? Are you growing? Are you profitable? Do you have enough cash available to pay all the bills next month? When do you think would be a good time to start that next project you were dreaming of? Are there certain parts of your business you could focus on improving that will really make a difference to how much money you make?
The best way for a smart business owner to answer these questions and many more like them is to regularly look at their financial reports.
In this post, I provide you with food for thought about the following:
- What is so good about financial reports?
- Why should you check your financial reports regularly?
- Which financial reports are a good place to start?
- How can you read and understand your financial reports? (without needing a degree in rocket science!)
- How can you ensure your reports are accurate and up to date?
Financial Reports are the Tools of the Trade For Smart Business Owners!
A good carpenter knows how to use a chisel. A good mathematician knows how to add two numbers together. A good business owner is …
When it comes down to it, a business owner that not only survives but grows to be successful is … you guessed it … someone that is good with money.
You probably wouldn’t think much of a carpenter that didn’t know how to create a woodworking joint, or a mathemetician that didn’t know how to add up. But why is it that many business owners think working with financial reports is too difficult to bother with?Financial Reports are the #ToolsOfTheTrade for #SmartBusiness owners Click To Tweet
Financial Reports are Not That Scary
Knowing how to read, interpret and understand financial reports is CRITICAL for any business.
We find that our clients often feel overwhelmed or have difficulty in understanding the financial reports generated from their accounting software. But with just a few little productivity hacks like the ones we’re about to go through, it turns out that working with your financial reports can be pretty easy.
What is so good about financial reports?
Used well, financial reports can give you up-to-date information about how your previous decisions have turned out for you. They are essentially a score card for business owners. You can see exactly where the business is doing well, where it might need a little work, and how it is going overall. For example, let’s say you decided to introduce a new product line this year. Your financial reports can tell you if it has improved the profits overall or if it is impacting things negatively.
Financial reports can help you get an idea about where you might end up in the future. This is invaluable when it comes to making decisions about future activities. For example, will you have enough funds available in the coming months to purchase that new equipment you have been considering? Will you have enough money to pay your next lot of bills when they are due?
There are also an excellent set of calculations you can run using the figures from your financial reports that give you even further insight. Such calculations include various ratios that are like power ups in your business journey. Occasionally you find one that gives you excellent ideas or helps you make crucial decisions in running your business.
Why should you check your financial reports regularly?
To use a sporting analogy, if you are in the middle of game of some sort, how can you tell your progress? You check the score. What happens if you don’t check your score? You have no idea whether you are playing well or if you are getting smashed.
In a similar line of thinking, let’s say you are on an intrepid adventure to some far flung destination in the wilderness. How do you know where you are and which direction you need to go? You read a map and check your progress as you go. What happens if you don’t keep checking? You either get where you need to go through sheer dumb luck, or you get savagely mauled by some wild beast!
Running a business is somewhat similar. If you don’t regularly check in to see how you are performing financially, you could have absolutely no idea about important aspects. For example, it is possible you could be hit with a massive bill from your taxation authority, or a major creditor, that could wipe you out and leave you insolvent. On the flipside, you could also be leaving good money on the table by not knowing that you have funds available to reinvest in the business.
There are many decisions to make in a business. Using your financial reports can help provide objective facts to support your decision making process.
Which financial reports are a good place to start?
The first is the Statement of Financial Position. You may hear this one more commonly referred to as the Balance Sheet. From its name you can assume it shows you the financial position of an entity at any given date. It lists three key pieces of information being a businesses Assets, Liabilities and Equity.
The Assets list will show things that a business owns or controls. It will include things like cash, bank account balances, accounts receivable, inventory, vehicles, plant and equipment etc
The Liabilities section will list all the items where a business owes money to someone. It will include items like credit cards, accounts payables, taxes, payroll obligations, overdrafts, bank loans, etc.
The Equity section will show what the business owes to its owners. It represents the amount of capital that remains in the business after is assets are used to pay off its liabilities.
The second report is the Income Statement. We more commonly know this one as a Profit and Loss Statement. This is the important one that shows us how we are performing in terms of net profit over certain periods. This report contains two important pieces of information which show our Income and our Expenses.
The Income section shows us what we have earned during a particular period. For example it will list all sales revenue (which can be broken down to key income streams for your business to assist with tracking different areas) or other items like dividend income etc.
The Expenses section show us all the costs incurred by a business over the same period. This would include cost of sales like subcontractors and materials, and general expenses such as salaries and wages, depreciation, running costs etc.
By comparing our income versus expenses we can then get a net profit position for the business for certain periods.
The third report is a Cash Flow Statement. This one is particularly useful as it helps us actually understand the movement of cash through our business (which unfortunately does not always relate to when we may earn income or have to pay for our expenses/liabilities etc).
This report shows the movement of cash flows by classifying information in three ways: operating, investing and financial activities.
The operating activities represent the cash flow from our main or primary business activities.
The investing activities represent the cash flow from purchasing or sale of assets (other than our main inventory items). An example would be the sale or purchase of equipment.
The financing activities represent the cash flow in/out that relates to raising or repaying capital or debt. This would also include payments of interest and dividends.
How can you read and understand your financial reports? (without needing a degree in rocket science!)
If you are a bit tentative at having a go yourself, schedule in some time with your bookkeeper, accountant or financial adviser. Ask them to prepare an updated set of statements for you beforehand and tell them that you would like to go through them together. Ask a small number of questions in the first session and leave it at that. Get the answers written down for you. Take it all home and keep referring back to them in your own time.
Once you feel comfortable with the initial information, consider heading back for a few more similar sessions. Alternatively, if cost is a consideration, start doing a bit of personal research. There is soooooo much information available on the internet these days that it is likely you’ll have no trouble coming up with something. The trick is to keep your questions small and focussed, and don’t be tempted to keep following that trail through the rabbit warren. You might end up on YouTube or Facebook if you hang out there too long and by that time you will have forgotten why you were there in the first place.
Gradually build up knowledge of your business’ financial reports over weeks, months, even years. Make it a regular habit by blocking out dedicated time in your diary. Each time you revisit the information, you’ll gain that extra little bit of experience and before you know it you will be in the zone.
How can you ensure your reports are accurate and up to date?
It begins with your bookkeeping. If you have good financial record keeping and data entry practices, then you will have accurate and up-to-date financial reports. The opposite is also true: garbage-in, garbage-out!
There are a couple of ways to ensure the information you keep is useful. First do some research on the most suitable accounting software for your business. There are a range of new products available nowadays that are accessible, cloud based and tailored for small business use. Many provide great features to assist with your record keeping and have useful help features. Once this software is set up and you develop a procedure and routine for keeping things up to date, information and reports will be available to you in a more timely manner.
The best way to get accurate and up to date information is to use a professional to help you with establishing these systems and processes. A qualified and well trained bookkeeper can assist you with the choice of accounting software, the correct set up and implementation of these systems. They can also help create a custom procedure tailored personally so you obtain relevant and correct information in a timely manner. A good bookkeeper can also assist with training, data entry, reconciliations and compliance work. Most importantly they can assist in tailoring financial reports to meet your needs, produce them for you on a regular basis and assist by explaining them to you as well.
Do Yourself a Favour
Regularly taking time out from normal business operations to review your financial reports is absolutely essential for all business owners. By reviewing this information you will get a good understanding of how profitable your business is, what liabilities you have that need your attention, and the cash flow position of your business.
Reviewing and understanding this information helps you make a range of strategic decisions and helps you prioritise where you are spending your time. You can then be proactive and timely about how you respond to issues that come up, rather than by being surprised if you only look at these figures once a year when you prepare tax returns etc.
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