Two Essential Financial Statements Every Business Owner Should Understand

If there are two essential financial statements that you would often receive from a bookkeeper, these are going to be the Profit & Loss Report and Balance Sheet. Business owners rely on these statements because they show the financial status of the business. Your bookkeeper interpret the figures and explain the how’s and why’s of the figures, but as a business owner, you remain clueless.

It is important that you know how to interpret these figures because they can help you monitor your business performance and make a sound decision. Your financial planners, bookkeeper and financial advisors will also have an idea of the business approach to use.

Balance Sheet

In a balance sheet, you can find the assets, liabilities and equity. Your assets include the items you own and the liabilities are the payments that your business owes. The difference is called equity or net worth. If you are looking for a comprehensive report that will help you tell the key performance indicators of your business, a Balance Sheet is a good financial statement you can refer to. With the use of a Balance Sheet, you will know the return on equity, financial strength, control of working capital and return on capital.

It may take a while before you completely understand a Balance Sheet because of all the technical terms you can find in it. When tracking liquid items, bookkeepers and business owners refer to Current Assets and Current Liabilities. You should be watchful of these amounts because they can help you make the right decision and manage your cash-flow. With the use of bookkeeping software, preparing a Balance Sheet regularly is easy.

Profit &Loss Report

If you want a summary of your business expenses and income, a Profit & Loss Report can provide you the information you need. It gives you an indication of your business’ performance. The report shows the sales, cost of goods sold, gross profit, expenses, operating profit before tax, tax payable and net profit. With a skill developed over time, you will be able to interpret the figures found in a Profit & Loss Report. The gross profit is one of the key elements of the report and it is expressed as a percentage. The Gross Profit Margin is important because it enables you to track your business’ profitability and compare figures with your competitors.

If there is a decrease in the Gross Profit Margin, it could mean an increase in inventory costs, heavy discounting or turning over profits with low margins. The Net profit Margin is measured as a percentage. A Profit & Loss Report must be prepared every month especially if your business is using bookkeeping software. If you practice regular analysis of your business, you will be able to unlock key business drivers. As a result, you will be able to determine the correct pricing, target shrinkage and even control costs.

It may take time before you can master interpreting these financial statements but once you know the significance of these figures, you can easily determine where your business is going. You can also create an effective business planning that increases the chances for success.

4 Tips About Reading Financial Report You Can’t Afford To Miss

Reading a financial report provides you information on the financial performance and condition of your business.

Just the thought of preparing a financial report is a challenging job let alone reading it. If you do not have any sound knowledge of bookkeeping, the numbers you see on the financial report will surely be foreign to you.

If you want to grow your business, you need to make sure that it is ready for the transformation. What better way to determine the financial health of your business than to read the financial report. Here are five tips to consider when reading a business financial report.

Decide what you are going to read

When you are reading a financial report, the first thing you want to know is how your business is doing. As the report contains lots of information, it can be very difficult to identify the section you should pay attention to. The report shows you the trend charts, financial statements, historical summaries and much more.

If you do not have the luxury of time to read the entire section, look for the highlights section. This section will give you a summary of the main developments of your business. You will also know the steps to take to improve your business.

Gain a basic understanding of accounting

While it is the job of your bookkeeper and accountant to prepare your financial report, this does not mean that you are no longer required to read the financial statements. You will still need to make a conscious effort to interpret these reports because they can play a big role in helping you decide of the direction your business will be taking.

Know your profit performance

There are many ways your business earns profit such as making sales and keeping expenses less than your sales revenue. You will be able to analyze profit performance by checking your sales revenue. Is it higher than the previous years? Do you know the gross margin ratio of your business? You will also have to keep in mind that judging profit performance should be based on general economic conditions.

Check your cash flow

Cash flow is important to business owners. Even if you are making a profit, this does not necessarily translate to having a steady cash flow. There are various ways a business can obtain cash, such as  selling off some assets, borrowing money or getting shareowners to put more money in the company.

What Is The Purpose Of Financial Report?

Financial reports are essential to every business because it helps you track and review the amount of money that your business spends and makes. It is also used to provide information to the shareowners and lenders of your business. Investors and lenders have the right to obtain information if their money is returning a profit or spent wisely.

A business owner must also take note of the elements that need to be present in a financial report. The report shows the profit and loss, but it should also indicate the profit your business is making and the loss it is suffering from. The assets must also be shown on the report so you will determine how your business is doing. Financial reports are not easy to interpret but there are businesses that may assume that the readers are knowledgeable about business and finance.

Although it is required for business owners to understand basic measurement methods and accounting terminology, it is important for readers to fairly interpret the reports to find out about the company’s financial standing. The financial report must also be kept legal by ensuring that it is governed by common and statutory law. The reports should be done based on ethical standards.

What companies should lodge financial reports?

•    the company with great sums of money involved;
•    the company that exists for charitable purposes and not for making a profit;
•    the general public that has invested funds with the company.

The following entities are also required to prepare financial reports according to Section 292 of Corporations Act 2001:

•    public companies
•    all disclosing entities
•    all registered schemes
•    all large proprietary companies
•    small proprietary companies that are foreign-controlled
•    small proprietary companies or small companies limited by guarantee
•    small companies limited by guarantee subject to a shareholder direction under s294a of the Corporations Act
•    small proprietary companies subject to a shareholder direction under s293 of the Corporations Act

How to lodge a financial report?

A copy of Form 388 of financial statements and reports must be secured, completed and lodged with the required documents. If a company holds an Australian Financial Service Licence, a business owner must also lodge a profit and loss statement, balance sheet and auditor’s report using a Form FS70.

The financial report must be lodged in accordance to Corporations Act. All other companies must see to it that the financial reports are lodged within four months after the end of the financial year. The company that has not made a profit or traded during the financial year will still be required to lodge their financial reports.

Bad Bookkeeping Can Definitely Wreak Havoc On Your Business

Bookkeeping is critical to your business and when your financial records are not handled properly, expect your business to take a turn for the worse. Perhaps you have already heard of business owners clamoring about their financial records because of paying less attention to this essential business aspect. A bookkeeper should not be the only person fully responsible for understanding your finances because as a business owner, you should also be involved.

Even in searching for a reliable bookkeeper, choosing someone who is experienced in the field is a must. You just cannot put your trust in an inexperienced bookkeeper and allow your business to fail. This is going to be unacceptable because you know for a fact that you could have been in control of the situation if only you had been keen on hiring a bookkeeper.

Professional bookkeepers are already acquainted with a wide range of tasks that their job entails. These are the people who are a valuable part of your business. Unfortunately, small businesses deem bookkeeper as an additional expense and to save money, business owners would rather rely on DIY bookkeeping. This cost-cutting practice can do more harm than good and instead of saving money, businesses can lose a great investment because the damage cannot be undone if bad bookkeeping practices are discovered a little too late.

You may appoint a relative to take care of your bookkeeping task hoping that you will get the same result as getting a professional bookkeeper, but when you review the financial record, you know that something is not right. There is no undo button once mistakes are committed and the sad part of bad bookkeeping is that you are often the last to know about your finances.

When a set of books are incorrectly completed, this is going to result in bookkeeping catastrophe. If you used to take cashflow for granted, later on, you will realise how important it is in managing your business. Aside from lack of adequate bookkeeping systems, business owners are also faced with problems with financial record-keeping. There are plenty of problems associated with bad bookkeeping such as missing out on identifying the money you owe to the suppliers and the bills that remain unpaid. When bookkeeping is not properly done, businesses can collapse. Aside from the inability to keep track of your finances, you will also have trouble checking your cash flow. You will never know whether or not you have enough cash.

The reason every business owner needs to hire an experienced bookkeeper is to make sure that the performance of your business is closely monitored. It is easy to overlook the most essential detail when your bookkeeper does not have substantial experience. Inexperienced bookkeepers will also have trouble understanding financial management’s importance in a small business and the critical role of accuracy when it comes to recording bookkeeping data. Not hiring a reliable bookkeeper is a costly mistake. Once the essential details are not recorded, it can bring devastating effects to your business that may be difficult to correct.