Monthly finance reports
Understand Your Financial Reports
A skilled bookkeeper provides more value to a business than just reconciling bank accounts and keeping accurate business transactions. They must be able to produce financial reports namely Income Statement (Profit & Loss), Balance Sheet and Cash Flow and help the business owner understand the health of their business.
Why are financial reports important?
Health indicators, like body mass, blood pressure, iron levels that doctors generate in the form of medical reports for us to understand our health. Financial professionals prepare financial reports for business owners to delve deeper into their business operations.
As a business owner, there are many questions you need to ask. Some of them are these business financials.
Main types of financial statements for small businesses
Profit & Loss
Also referred as an Income Statement, reports revenues and expenses over a particular period. The balance between the two will give you a profit or loss.
Total revenues – total expenses = profit/loss
Looking at the bottom line does not give you a whole picture. The question you should be asking is how is the business making a profit or a loss?
A Balance Sheet shows you what the business owns (assets) and what the business owes (liabilities) at a given time. The balance between the two will give you the net worth (equity).
Total assets – total liabilities = equity
Why are they important? It’s vital to use financial reports as tools to monitor business health. Without them, we’d imagine business owners would not be able to make informed decisions.
These two financial reports must be read together. The bottom line may not be what it seems. Below are some scenarios you may find in your business.
I’m making a profit but where is my cash?
Note that P&L only shows the operation side of things whereas the balance sheet shows what is owned and owed. So the balance sheet will report where the money went. It could be used to purchase stock, repay loans or pay taxes.
I’m not making a profit but why do I’ve cash?
One obvious reason is you’ve just got a loan.
Your creditors’ terms of payment could be longer e.g. 60 or 90 days and outstanding bills haven’t been paid.
You haven’t replendish stock level.
And of course you haven’t lodged your BAS as GST and others accounts are not shown on P&L.