Making time to review your financial reports each month is an important task for any business owner. If you are not doing 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 you start.
But before we get our six 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 (P&L), the Income Statement, or the statement of financial performance – tells you, as the name suggests, how your business is performing over some time, such as a month or a financial year. In broad terms, it shows the revenue your business has generated, less the expenses for that period. In other words, it shows how profitable your business is.
Balance sheet or The Statement of Financial Position – shows the value of the business’s Assets, Liabilities and Equity.
- Assets include things like money in bank accounts, Plant and Equipment, and Accounts Receivable balances.
- Liabilities include things like Bank loans and credit cards, Accounts Payable, and Hire Purchase balances.
- Equity is the difference between your Assets and your Liabilities and includes Retained Earnings and Owner Funds Introduced.
Accounts Receivable Ageing report (Aged Receivables): This shows how much money is still owed to the business as of a certain date in time. It is usually segmented by how overdue the accounts are or by how far past the invoice date they are. Generally, you will have Current, 30, 60, and 90-day 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?
- 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 gives 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, so you can clearly see on one page the revenue and expenses month by month. This also helps identify trends in your data and many also help to highlight anomalies in coding/categorising or unusual expenses or earnings.
- Accurate information for lending purposes – 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.
- 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), your Aged Payables report will alert you to any unpaid or overdue amounts. Supplier relationships are an important aspect of your business; paying on time is crucial to maintaining those relationships.
- Better cash flow — An accurate understanding of the business’s debts can help with cash flow planning to ensure that there is enough money when needed. Additionally, understanding the business’s trends, profitability drivers, expenses, etc., can help plan sales and marketing campaigns so that 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 would like to know which reports are relevant to your business and better understand what’s going on in it, get in touch so we can go through them with you.
Your business success is important to us, and we are here to help you.