What your financial reports can tell you
Posted on 11th September 2019 at 09:08
There’s a lot to think about when you’re running a small business.
Accurate and useful financial reports can save you time and help you to make important decisions.
But which ones do you need and why?
There are a lot to choose from, so here are some common reports and how they can help you run your business.
For a quick snapshot of your business, a balance sheet, also known as a ‘statement of financial situation’, is really helpful. It will show you what you owe and what you need to reserve to pay your tax and VAT, for example. It will also show longer-term commitments like the start-up capital you might have invested and any borrowing. These are called your liabilities.
It will also show your assets, such as money in the bank and any property or equipment you own.
All businesses need to have this information, but for small businesses, it can make the difference between success and sleepless nights. You might review your balance sheet every month or every quarter to make sure you understand your financial position. The only drawback is that it is based on the past and present and doesn’t look at trends or the future.
A statement of your income is often called your ‘profit and loss account’ (or P&L). It shows whether you have made or lost money over the last month or quarter.
You can use it to predict future sales and costs, which will help you to understand whether your business is sustainable in the longer-term.
This will tell you how much you make from your sales after you have paid for costs of goods or services (COGS) directly related to running your business such as stock in a shop or products that you resell to your clients. Your gross profit is your business income minus COGS.
To work out your net profit, you deduct expenses such as payroll and rent from your gross profit.
This will show you how much money is coming in and going out of your business at any moment. It will help you to understand how your daily operational costs affect your business’s overall financial position.
To avoid information getting confused or lost, you should check your cashflow every month.
By looking at the balance at the start of the month, adding your income and taking out your expenditure you will be able to see whether your business finances are improving, growing or declining. If things aren’t going as well as you would like, you will be able to see why and take some action.
Late payments damage your cashflow. Your accounts receivable (AR) report will show you if any of your customers are late with their payments.
Checking your accounts receivable regularly will allow you to remind any customers who are late with their payments promptly and you can keep an eye of people who are regularly late, paying you in 45 days instead of 30, for example.
In extreme cases you might withhold products or services until payment in full has been received.
Accounts Receivable Days (AR Days) will tell you the average number of days it takes your customers to pay you, while Accounts Payable Days (AP Days) is the average number of days you take to pay your suppliers. The difference between these two figures tells you how much cash you will normally have available.
By monitoring your Days, you can make sure that your cash availability is stable. If the difference between the two figures starts to change you can review how you operate to keep things under control. For example, you could change payment terms for your customers, change your invoice dates, or negotiate more flexible payment options with your suppliers.
Budget versus actual
Comparing your actual spending to your budgeted costs and your revenue to your sales projections will tell you whether your business plans are realistic.
You can use this report to work out where you are spending too much or where you have underestimated your actual costs. You might also be spending less than you expected, which could mean you have funds available to develop another part of your business or to invest in better equipment.
We’re always happy to explain your financial reports in more detail and can create bespoke reports if you have some special requirements. Just give us a call.
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