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.

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