The Financial Reports You Need To Understand When Running A Business
Understanding your business’s financial reports is critical when making informed decisions for your company and setting it up for success. In this article, we’ll show you how to understand the most important ones.
Understanding your business’s finances can be complex and confusing. However, it is crucial to keep good track of the money going in and out of your company. It is one of the fundamental necessities for running a successful business.
As a business owner, you are always looking for new opportunities to expand your business — whether that’s looking to scale or developing entirely new markets. This means it’s important to understand how the financial reports that you’ll be using can help you with these challenges, aiding you in making informed decisions. While financial reports can be convoluted, they are easier to control and understand once it’s broken down.
The importance of financial statements
It’s important to review your business’s finances on a regular basis consistently. You should be proactive about how to improve the operations of your business — otherwise, it will not be capable of growing. Additionally, areas of weakness or risk can be easily overlooked without regular self-assessment.
This is where financial reports come into play. Financial statements and reports are standardised measures of a company’s financial health. Financial health gives oversight on a business’s state of monetary affairs — a ‘healthy’ business often reflects a strong and stable foundation for success. Not only are financial reports good to assess the stability of a company’s accounts but are also great tools for financial forecasting.
Types of financial reports
There are several financial reports that a business owner needs to be aware of. Interpreting financial statements and business reports might seem overwhelming at first, but they are a treasure trove of insight for your company. There are three main ones that are critical to running a company smoothly.
Income statement
The income statement is also known as profit and loss, income and expenditure, statement of operations, or statement of income. The income statement outlines the total revenue and expenses, usually on a monthly basis. It records the incoming revenue and outcoming expenditure.
The income statement will highlight expenses you might not have considered an expense or loss. For example, depreciation (the reduction in an asset’s value) is regarded as an expense loss to the business. If the value of a business asset lowers, then that also lowers the value of the business overall.
You gain vital information through the income statement, especially profit and operating profit. The operating profit (gross profit) usually refers to the profit made from sales and direct operating costs of the business. Net profit, on the other hand, is the overall profit made after overheads and general expenses.
Cash flow
The cash flow statement provides a timeline of profit, it breaks down when exactly income (cash in) is received and when expenses (cash out) are paid. Cash flow is great for forecasting the future of the business’s flow but also brings to focus any looming payment deadlines. If important costs are not paid on time, this could then result in a domino effect of not being able to fulfill operations, or give a bad reputation to stakeholders — for example, if you pay a major contract late then they may put you on stop and not deliver materials, also last minute payments could result in cash being used instead of another crucial spend such as payroll. A cash flow can be used to plan the steps that need to be taken to avoid situations like this.
There are two types of cash flow. There is a short-term cash flow (tracking cash generally over a 12-week cycle) and a working capital cash flow which is generally forecasted over a longer period of time such as 12 months.
The working capital cash flow is divided into three sections: operational activities, investment activities, and financing activities. By separating it into these three sections, it is easier to isolate issues and locate where potential cash flow issues may arise.
- Operational activities refer to the money exchanged for operations, whether it’s received or spent, for everyday business activities. This includes sales, direct costs of selling, operating costs, movement in stock and salaries, etc.
- Investment activities refer to the money exchanged through investment. This includes investments such as business acquisitions, purchase or sale of assets, etc.
- Financing activities is to do with money associated with debt. This includes debts made, debts repaid, loans, issuing shares for cash, and paying dividends to shareholders.
Balance sheet
The balance sheet identifies assets, liabilities, and equity. Assets are resources that are controlled by your business and are usually bought to increase a company’s economic value. Liabilities are sums of money that a company owes. They are settled over time through the exchange of money, goods, and/ or services. In a balance sheet, liabilities encompass things such as loans, accounts payable, mortgages, taxes due, and accrued expenses. The equity section (traditionally known as the net worth of a business) refers to the overall trading position of a company, including overall profit or loss, and money that has been invested into the business, such as from the issue of new shares
There are numerous ratios that can be used to determine liquidity, operational capability, and debt vs. equity calculations.
Bookkeeping for your business
As financial statements can have a great impact on your business and its potential for growth, it cannot be stressed enough how important it is to keep on top of your bookkeeping. Reliable and accurate documentation of your business’s data will provide invaluable for financial forecasting and strategising for the future.
While it is important to understand financial statements and reports, it is also a time-consuming process — and on top of running operations, this can be cumbersome for a business owner. Fortunately, you can outsource a professional accountant who can handle your reports and accounts for you. With their knowledge and expertise, they can relay only the key information to you that is necessary for your company’s growth.
Are you interested in hiring a professional bookkeeper to handle your financial reports? Get in touch with us today to learn more! We can be contacted via email or by phone at +447843559414.
