small business owners understanding financial reports
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Why Do You Need to Understand Your Financial Reports?

If you are like many small business owners, looking at your financial reports can seem daunting, and as a result, you put it at the bottom of your to-do-list. However, your financial reports are more than just numbers and graphs. Running a business without reviewing your financial reports is like reading a book with missing pages. You may enjoy it at first, but at some point, you would start getting confused and not sure what’s going on. Those numbers provide an important story and insight about your business, and they can help you in making sound decisions.

If you don’t review your numbers because you’re too busy, or perhaps you don’t understand what you’re looking at and it makes little sense to you, here are some reasons you should start to.

But before we get to the why, let’s talk about which reports you need to look at. There are a lot of factors to consider, but at the very least you should look at:

The Profit and Loss Report (P&L) or Income Statement

It is the most popular and most common report in any business plan. As the name suggests, it tells you how your business is performing over a period of time, such as a month, a quarter, or a financial year. It shows the revenue that your business has generated, less the expenses for that same period. In other words, it tells you if your business is profitable or not.

The Balance Sheet

Also known as the Statement of Financial Position, shows the value you the business’ assets, liabilities and equity at a specific point of time. For example, 30 June.

Assets are what the business owns. They include tangible items, such as cash at bank, inventory, equipment, and money owed to you (accounts receivable). Assets can also be intangible, like goodwill and intellectual property.

Liabilities are how much your business owes to others. They include things like bank loans, credit cards, payments owed to suppliers (accounts payable), and other debts.

Equity is the difference between your Assets and your Liabilities. It represents what you would have left if all assets are liquidated and all debts are paid off.

Along with other reports, the Balance Sheet is a powerful tool that can help you to measure the health of your business. In our blog Decoding Your Balance Sheet, we talk about the structure of a Balance Sheet and things to look for in a Balance Sheet report.

If you want to know some of the commonly used financial jargons, check out this glossary of financial terms summarised by Business Queensland.

Aged Receivables Report

This report shows you the amounts your business is owed by customers at a specific date. It usually shows the amounts and how long they have been overdue.

Aged Payables Report

This report shows you the amount of money your business owes to the suppliers at a certain point in time. Like Aged Receivables, it is usually categorised by the overdue period.

Running the above reports is difficult if you don’t use an accounting software. We recommend all businesses to use an accounting software to maintain good record keeping practice and to provide accurate reporting. If you would like to know more about choosing your accounting software, contact us and we will go through it with you.

So, why do you need to understand the financial reports?

1. Compliance

The most obvious reason is for tax and reporting purposes. Accurate reporting will help you your tax obligations. We can also help you do a tax planning, so you have a plan in place before the end of the financial year. If you understand your taxes, you can better manage your cash flow, debt repayments, and other obligations.

2. Gain a better understanding of your business

By looking at your Profit and Loss report every month, you will get a picture of how your business is performing each month. It will give you a better understanding of what makes up your profit. It’s also helpful to compare periods or to look at a month-by-month Profit and Loss. That way, you can see the revenue and expenses each month. This will help to identify trends in your data and may also help to highlight anomalies in categorising/coding.

3. Provide accurate information for lending and grants

If you are applying for a loan or an overdraft, the financial institution or grant provider will look at both your Profit anf Loss report and the Balance Sheet. They can learn a lot about a business by looking at these reports together. If you are unsure what some of the numbers mean in your accounts, get in touch and we will be happy to explain them further.

4. Get paid quicker and reduce bad debts

By looking at your Aged Receivables report every month, you can follow up overdue accounts, 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.

5. Better relationship with your suppliers

A quick review of your Aged Payables report reveals your creditors, how much money your business owes them, and how long that money has been owed. It can assist you in determining which suppliers to pay immediately and help you to maintain good relationships with your suppliers.

6. Better cash flow management

Understanding how much your business earns and how much money it owes, can help with cash flow planning to ensure there is enough money when needed. Additionally, understanding the trends of your business, its profitability drivers, and its expenses, can help your sales and marketing plan so that revenue keeps coming in.

7. Better business decision making

Your financial reports tell the story of your business, and it is important that you understand the story 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 your business profitability and its financial viability.

If you would like to know how to read your financial reports and know what story they tell you about your business, book a time so we can go through them with you. We are your business partner and we are here to help you succeed.

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