Understanding Your Financial Reports
I’m sure you’ve seen financial reports for your business before. Your accountant or bookkeeper has probably produced them for you, or you might have had a go at producing them yourself.
But the question is, do you know what they mean?
Well, if you’re like most business owners, you don’t. You might understand a bit about the profit and loss report, but that’s usually about it. Is this you?
I’m not surprised that business owners find it confusing. Accountancy has a language all of its own and rules that are hard to get your head around. I’ve seen enough accountants struggle to understand what the numbers mean, let alone business owners.
I wouldn’t expect a business owner to be an expert on this – you’ve got enough to be worried about. But it would be extremely useful to know a few basic concepts and terms so you can start to understand what your numbers mean.
The main financial reports are the:
- Profit and Loss Account,
- Balance Sheet, and
- Cash Flow Report.
But what do they mean? Well, a good analogy to use to explain the different reports and what they’re telling you is to compare them to the instruments on the dashboard of your car.
Just like your dashboard gives you feedback on how your car is performing, your financial reports tell you how your business is performing.
The speedometer in a car shows you how fast you’re going. This is similar to your profit and loss account which shows you how fast your business is moving over a given period of time, usually over a month, quarter or year.
Your profit and loss account includes your sales, costs and profits over a given period.
It’s got nothing to do with the health or financial strength of the business, just simple how many sales and hoe much profit the business has made over a given time period – so how fast your business is travelling.
The temperature gauge shows how hot your engine is, a bit similar to your balance sheet. Your balance sheet gives you a gauge of the financial temperature of your business at a given point in time.
This includes your assets, liabilities and investments. The first place you should start when looking at a business is actually your balance sheet.
You can’t tell how good a business is by just looking at the profit and loss account, just like you can’t tell the health of a car by how fast it’s going.
The fuel gauge shows you how much fuel is left in the car. Cash is the fuel of a business. If you run out of cash, your business will stop running, just like a car when it runs out of fuel.
Cash flow reports show you how much cash you’ve got in the business and help you avoid running out.
Cash flow is focused on payments and receipts when they affect your bank account. There’s a big difference between profit and cash.
I hope you found this blog post useful and that it has given you a bit of an overview of the financial reports in your business. If you would like any help or would like to discuss this further, please give me a call on 1300 300 746.
Also, as a reader of this blog I’m happy to offer you a complimentary 90-minute introductory business coaching session.
This is a great opportunity to see what coaching is all about and to get advice about your financial reports. During this session, we’ll:
- review where your business is now and where you want to take it,
- look at your current challenges and your opportunities, and
- advise you on what you need to do to take your business to the next level.
Either CLICK HERE or call 1300 300 746 to book your complimentary 90-minute introductory business coaching session.