With 24% of business’s failing in their first year, it is vital that owners/managers keep an eye on the ball …. which means regularly looking at and understanding some key financial reports. It is continuously surprising the number of businesses that either do not regularly produce nor review financial reports. So how do the business owners/managers know where they are at and where they are heading? The simple answer is ….. they don’t.
Following are the suggested minimum reports to produce and review.
Profit & Loss: This report indicates the revenue and expenditure, and therefore the net profit or loss, for a specific period. When preparing the Profit & Loss, not only is the bottom line important, but equally critical is the percentage of each expenditure to sales (not wages to sales).
Cashflow: The cashflow statement shows all sources and uses of a business’s money during the accounting period. Businesses that have not or do not produce cashflow statements are unlikely to know of cashflow problems until they physically happen. This statement is fundamental to the good health of any business.
Balance Sheet: The balance sheet is based on this equation: assets = liabilities + owners’ equity. It lists everything the company owns (assets), everything the company owes (liabilities) and the value of the owners’ ownership stake in the company (owners’ equity, or capital).
Budget: Budgeting is the process of trying various mixtures of resource allocation, until one particular combination emerges which best meets the spirit, direction and outcomes in view of the goals and objectives of the business. When a budget is completed (refer “At a Glance” (in the margin left) for tips on developing a Budget) it is critical to monitor progress against the budget to make any necessary adjustments sooner rather than later (when their may not be sufficient resources to allocate). With history, budgeting becomes more robust in businesses as fixed costs become more routine and planning for potential recurring costs more sound.
Debtors: Debtors are people who owe the business money (also referred to as “accounts receivable”). It is important to monitor debtors particularly those not paying. Good business practice includes communicating the terms of debtor arrangements clearly before allowing a payment on credit. All businesses have a clear legal obligation to be able to meet debts as they occur. Therefore, it is critical that all businesses have funds available to meet their costs. If businesses have debtors outstanding for lengthy periods, then businesses’ ability to pay its debts is strained.