Making time to look over your financial reports each month is an important task for any small business owner. If you are not taking time to do this, either because you’re too busy or perhaps you don’t really understand what you’re looking at and it doesn’t make sense to you, then here are six reasons why you should start doing it.
But before we get into our six reasons, let’s talk very quickly about which financial reports to look at. At a bare minimum, and depending on the complexity of your business, you should be looking at the following:
The Statement of Financial Performance – also known as the Profit and Loss report (P&L) or 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.
In broad terms, 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. Understanding your Profit and Loss Statement is crucial as it highlights the cost of goods sold, operating expenses, and ultimately, your bottom line.
The Statement of Financial Position – also known as the Balance Sheet – shows the value of the business’s Assets, Liabilities, and Equity.
- Assets include things like money in bank accounts, Plant and Equipment, and 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. It’s also important to consider Shareholders’ Equity in assessing your company’s financial health. All these elements are listed on the Balance Sheet.
Accounts Receivable Ageing Report (Aged Receivables) – this shows how much money is still owed to the business as of a certain date in time, and is usually segmented by how overdue they are, or sometimes by how far past the invoice date they are. Generally, you will have Current, 30 days, 60 days, and 90 days columns. Understanding this report helps in managing working capital effectively and highlights the total amount owed.
Accounts Payable Ageing Report (Aged Payables) – this report shows who the business owes money to as of a certain date in time and, like the Accounts Receivable Ageing report, is usually segmented by overdue period. This is crucial for understanding your short term obligations and the accounts payable process.
Why Bother?
1. 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 month by month, giving 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 the revenue and expenses month by month.
This also helps identify trends in your data and may also help to highlight anomalies in coding/categorising or unusual expenses or earnings.
Knowing your bottom line and operating expenses is essential for understanding your business operations and financial reporting.
2. 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. Accurate financial data is crucial for demonstrating the health of your business and understanding your asset accounts.
3. 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. Ensuring a positive cash flow is essential for maintaining the financial health of your business.
Understanding your Accounts Receivable (AR) and payment terms helps in managing cash flow and reducing bad debts.
4. 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.
This helps in managing your business expenses efficiently. Understanding Accounts Payable (AP), due dates, and short term obligations is key to maintaining good relationships with suppliers.
5. 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. Efficiently managing cash flow is crucial for maintaining the operational integrity of your business. This involves monitoring goods and services, raw materials, and other business expenses.
6. 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.
Recognising key takeaways from your financial reports can aid in strategic decision-making and enhance the overall health of your business’s financial data. This includes understanding the importance of financial reports for small business owners, how to understand business financial statements, and the monthly financial report review benefits.
If you would like to know which reports are relevant to your business, 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 with you.
Your business success is important to us and we are here to help you.
