It doesn’t matter if you run a small business or a large corporate entity, if you don’t consistently generate a profit, your business will fail. Just look at what happened to Thomas Cook!
But how do you make sure you always know the exact financial status of your company? Well, as a local accountant, we would, of course, always advise you use an accountant and preferably one that is interested in doing more than just your Year End Accounts. Why? Because they are one of the few people who have all your business information at their fingertips, so are ideally placed to spot trends, identify areas for improvement and warn you if things aren’t looking too hot. It’s why many businesses choose an accountant who doesn’t just do the books but also offers business growth services.
But even if your accountant does everything for you, it doesn’t hurt to have at least a cursory understanding of financial reporting.
It’s why today, we are going to take a look at the three most important financial statements – the cashflow statement, balance sheet and profit and loss statement. Taken as a whole, they present a complete picture of the financial condition of a business, so if you have an understanding of what information each provides, you’ll be in a much stronger position to manage your business.
Why a Cashflow Statement is so important
Essentially, a cashflow statement allows you to forecast how much cash you need to meet your upcoming commitments. It’s a great way of helping ensure your business will be ready for any financial eventuality, as it will enable you to spot trends in your income and expenditure.
Although each company will have its own unique cashflow components, the general setup is usually the same and consists of:
- Operating cashflow: This gives you the net income minus any operating costs and shows you the profitability of a company over a period of time.
- Cashflow from investment activities: This could include the purchase of long-term assets such as property or equipment, acquisitions of other businesses or investment into stocks and bonds.
- Financing cashflow: This includes any bank loans, venture capital investment and dividend payments.
So, how often should you produce a cashflow statement? Our business advice is – if you’re paying expenses and purchasing inventory on a monthly basis, then you should also report on your cashflow monthly. This will help you keep a handle on exactly what’s going on. And try and be strict about this! As experienced Aylesbury accountants, too often, we’ve seen local companies flounder, all because they hadn’t realised that a particular month of the year is always bad for business. It’s why having a proactive accountancy firm, who are interested in helping you grow your business can be a massive plus.
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Use Profit and Loss Statements for decision-making
Also known as an Income statement, for many business, the P&L is the most important financial statement. This is because it tells you if you business is capable of generating a profit. You can then use that information to decide whether it’s enough profit to justify expanding your business or buying new equipment.
P&Ls can be completed on a weekly, monthly, quarterly or yearly basis and although it’s also one of the easier financial statements to understand, as it simply extracts expenses from any income generated, we would always advice hiring experienced accountants or bookkeepers to complete the work for you. After all, even if you use accountancy software, you should be focused on growing your business not worrying about reconciling bank accounts!
How to use your Balance Sheet
A balance sheet reveals the financial status of a business at a particular moment in time. Also known as a ‘statement of financial position’, it provides valuable information on:
- What a company owns (assets)
- How much a company owes (liabilities)
- The amount invested in the business (equity)
One of the reasons the balance sheet is so important is that it gives you an accurate overview of your company’s financial health. So, while the profit and loss statement might tell you you’re making a huge profit, the balance sheet will stop you spending it all by providing valuable information on any large liabilities owing.
Balance sheets also provide details from previous years, which enables you to track your performance, identify ways to build up your finances and spot where you need to improve. It’s why if you’re looking for a bank loan or are planning to sell your business, an up-to-date and accurate balance sheet is a must.
Looking for a local accountant to help you out?
While there is no legal requirement for an unincorporated business to prepare a balance sheet or P&L, for tax or any other return, both must form part of the accounts of limited companies. If you need help with your accounts, tax return or are interested in how we use these financial reports to help grow businesses, get in touch.
As Tring accountants, we’ve lots of experience of helping ambitious clients from London, Aylesbury and across Buckinghamshire use the information from these financial statements to take their business to the next level.
