As an entrepreneur, it is critical to make sure you have the knowledge to make the best business decisions. Without the knowledge of your business, you will be at a disadvantage to similar business owners within your industry who take ownership of their results and take an active interest in knowing their numbers.
“Knowledge, like air, is vital to life. Like air, no one should be denied it.”
― Alan Moore, V for Vendetta
There is no better way to understand your business than through reviewing financial reports, they can tell you a story of imminent success or of impending doom or whether your business is complete fiction or built on solid facts. Even though this story is largely built on numbers, they can spell out success or the early warning signs of failure.
A vast number of business owners try to outsource the ownership of their accounts and accounting reports and rarely ask questions for the fear of looking silly in front of their accountant, but, take this from me, there are no stupid questions and if your accountant or finance team make you feel "stupid" or "silly" then, get another accountant or ask someone else. The more comfortable you are in looking at these numbers and what they mean, the more comfortable you will be in addressing the challenges in your business and driving forward.
1. Profit and Loss Statement (P&L)
The profit and loss statement is also know as the income statement and if you use ANY accounting software you can review your profit and loss statement for any given time period almost instantly. I would recommend looking at your profit and loss statement at the start of each month to review the previous month and financial year to date. The aim is that your revenue for the month is greater than your expenses, then you will have made a profit. If you make a profit, you are likely to pay tax on this profit.
If you are profitable each month then this is great, well done! If you are incurring losses each month, you need to make changes. In any profit and loss statement, I will always find room for improvement but try to tackle one area of your business at a time. If you need to increase revenue and sales, then look at different ways of growing your business (this will be my next blog). If you are capacity, then you need to look at whether costs need to be cut.
Once you have taken time to review your P&L, then you can start to compare this with previous months or years to see if there are any trends or cycles, you can even bring in some Key Performance Indicators (KPIs) to monitor your performance in certain key areas of your business too.
2. Balance Sheet
The balance sheet is a picture in time of your business and on a particular date. Unlike the profit and loss account, which is over a time period, this is a snapshot on a particular day. Again, every accounting software will have a balance sheet report which you can print off and review. Generally, accountants look at where your business is a the end of a particular month, but if you are a small business, this needs may be out of date, so as long as your bookkeeping if up to date, you can review your balance sheet as at todays date.
The balance sheet lets you know what your business OWNS and what it OWES and how you are financing your business. So, if you have purchased a lovely new mac book for your business, this is a fixed asset and would appear in your balance sheet. If you have sent a client an invoice but they have not paid, you would see this as a debtor. If you have any cash in your bank, you would also see your bank balance here.
Once you are comfortable with how you balance sheet looks and what the numbers mean, you can begin to compare this with different months and years and see the changes and trends and bring in some KPIs to monitor your business health.
3. Cash Flow Statement
Where did my money go? If this is a question you are asking yourself, you need to look at your cash flow report. This is definitely the first report I would focus your attention on and more than likely will be the easiest report to understand.
Again, this is a report any accounting software should give you. Like the P&L, you can run this for any time period, but I would start with the previous month and year to date but I would look at this report once a month.
Cash flow report will help you see whether you have too little cash, if so, then you need to either increase sales or cut costs or whether you need to acquire temporary financing to fill the gaps. If you have too much cash, then you need to see whether you are missing out on opportunity to grow or invest in your business.
The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality.
How to use your financial reports to grow
Sometimes it feels overwhelming to be in business and you need to focus on the areas on your business which can give you the best insight. By looking at these reports you can begin to develop your knowledge of accounts and how this can affect your business, you will quickly begin to understand the improvements you might need to make and take opportunities which may present to you.
No matter how big or small your business is, no matter if you are in the first few months of trading or if you have a large multi national business, to understand more about your business you need to know, understand and be taking action each month using these three reports to keep progressing and moving your business in the right direction.
But you’re busy, so don’t spend hours drowning in numbers. Stick to these fundamental reports. Armed with the financial knowledge these reports provide, you’ll have the know-how and insights necessary to propel your business forward.
If you would like to know more about your business reports or you need management reports for investors either send me an email at firstname.lastname@example.org or book a call with me to discuss what you