Six powerful reasons to read your financial reports

Making time to look over your financial reports each month is an important task for any business owner. It’s easy to push this to the side – you’re always busy or perhaps you don’t really understand what you’re looking at. However, your financial reports hold a wealth of information vital to the ongoing success of your business.

Before we look at our six reasons, let’s look at which reports to focus on. Depending on the complexity of your business, at a minimum you should regularly be looking at the following:

• The Statement of Financial Performance: also known as the Profit and Loss report (P&L) or the Income Statement, this report 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.

• The Statement of Financial Position: also known as the Balance Sheet, this report shows the value of the business’s assets, liabilities and equity.

  • Assets include things like the cash in bank accounts, plant & equipment, and accounts receivable balances.

  • Liabilities include things like credit cards and bank loans, accounts payable, and hire purchase balances.

  • Equity is the difference between your assets and your liabilities and includes retained earnings and owner funds introduced.

• Accounts Receivable Ageing Report (Aged Receivables): this shows how much money is still owed to the business as at a certain date in time. This report is usually organised according to how overdue the balance is. Generally, you will see current, 30, 60 and 90 days columns.

• Accounts Payable Ageing Report (Aged Payables): this shows who the business owes money to as at a certain date in time. Just like the Accounts Receivable Ageing report, it is usually divided up by overdue period.

Knowledge is power. Here’s why we need to delve into these reports:

1. Understand your business better: perusing your Profit and Loss report each month will help to get a good picture of how your business is performing and gives you a better understanding of what makes up your profit. Reading through a monthly P&L means you can clearly see on one page how the revenue and expenses are tracking month by month which is helpful in identifying trends or could help to highlight anomalies in coding or unusual expenses or earnings.

2. Accurate information for lending purposes: if you are applying for a loan or an overdraft, your potential lender will look closely at both your Profit and Loss report and Balance Sheet as a lot can be learned about a business by looking at these reports together.

3. Get paid quicker and reduce bad debts: checking over your Aged Receivables each month means you can follow up with overdue accounts promptly which often results in getting paid quicker. The longer an overdue invoice is left unpaid, the higher the risk of it not being paid at all, so it is important to stay on top of this.

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.

5. Better cashflow: having an accurate understanding of how much money the business is owed and how much money the business owes in turn is vital to cashflow planning. Additionally, understanding the trends of your business, its profitability drivers, its expenses, etc., can help you to plan sales and marketing campaigns so that the revenue keeps coming in.

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.

   
   

If you would like to dive deeper into your reports and better understand what’s going on in your business, contact us - we're here to help.