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, then here are 6 reasons why you should start to.
First things first, let’s quickly go over which reports to look at. Depending on the complexity of your business, you should at least be looking at the following:
- Profit and Loss report (P&L) – also known as 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, 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.
- The Balance Sheet - shows the value of the business’s assets, liabilities and equity.
- Assets include things like money in the bank account, equipment, 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 at a certain 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 at a certain date in time and, like the Accounts Receivable Ageing report, is usually segmented by overdue periods.
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 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, so you can clearly see on one page how the revenue and expenses are tracking each month. This will help to identify trends in your data and may also help to highlight anomalies in coding/categorising.
- 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 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 would like to know which reports are relevant to your business specifically, 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 together.
Don’t pass up the chance to attend our Know Your Numbers webinar either! Register below for September 22nd 2020 or email us for the recording.