Do you understand the key financial statements available from your business accounts, as well as the information within each of them? If not, read on.
If you don’t have formal accounting training, financial reports can be quite confusing, and may even deter you from looking at them at all, ultimately meaning that you’re ignoring the information they can provide.
Here’s a simple overview of the key financial reports you should be looking at on a regular basis.
Profit and loss
A profit and loss statement (P&L) is one of the key reports for any business to run. It records all your transactions for a given period, usually the financial year ending on June 30. Your P&L tells you how much you’ve recorded as sales for the year, less what you’ve spent – the difference is your profit or loss for the year.
Your balance sheet records the assets and liabilities of your business at any given date. It’s the equivalent of listing all the things you own (such as your house, car, other belongings and maybe some investments), less all the things you owe (your mortgage, credit card debts, car loan and so on).
In a business you can’t just list these items, you have to keep records of them to satisfy the ATO. More importantly, knowing how to read a balance sheet can give you lots of information to help you run your business, such as a summary of the total amount of money you’re owed and that you owe others.
Accounts receivable and accounts payable reports
The accounts receivable and accounts payable reports are also sometimes referred to as trade debtors and trade creditors reports. While the balance sheet shows the totals due, these reports tell you who owes money and who you owe money to, plus how old the debts are.
Want more articles like this? Check out the financial management section.
Cash flow reports and forecasts
One of the difficulties with the reports above is that they’re prepared on an ‘accrual basis’, in which sales income is recorded when you raise the invoice, not when you get paid; and expenses are recorded when you enter the supplier invoice into your system, not when you pay it. It’s important to prepare your accounts in this way but it does mean that you can’t use those reports to forecast you cash position.
Your cash flow report contains information drawn from a combination of the P&L and the balance sheet, and tells you where the cash in your business has come from, and where it has gone.
This is one of the most misunderstood reports of all. Whereas accountants traditionally prepare a cash flow report covering the past 12 months, most business owners don’t care about cash flow in the past – they want to know what is going to happen to their cash balance in the future. For this, you need a cash flow forecast – we will look at this in more detail in a future article. In fact, the next articles in this series will discuss each of the above reports in more detail.
Do you have any questions or comments about financial reports?