The more you understand your business, the better decisions you can make.
Once your bookkeeping entries are up to date and reconciled, you can generate useful Financial Reports from your accounting software. If you maintain your books in Excel, it’s still possible to prepare these Reports manually but it will be more difficult and take longer than simply pressing a "Report" link.
We recommend using Xero or MYOB and having your system professionally set-up with training by an accountant or certified software adviser. Because incorrect or poor-quality input will produce faulty output, which will cost more to fix later.
The Income Statement, also called the Profit and Loss Statement, is the report that will tell you how your business is performing over a period of time.
Xero software has a default layout which is easy for anyone to work with. All you need to do is choose the date range and display the report. To customise the report further, click ‘Edit Layout’. You can combine accounts, use custom date ranges and insert columns for formulas, percentages and budget comparisons to compare your actual profitability against what was expected. You can save a custom layout for future use.
Xero also has a Business Performance Dashboard where you can view powerful Key Performance Indicators which can be used to assess current financial viability, set goals and track progress. It’s important to know which KPI’s are relevant to your business. You can discuss these metrics with your accountant.
Tracking performance will let you identify problems in the early stages and make any necessary adjustments. Small business owners often look at:
- Cash Flow Forecasts
- Gross Profit Margin
- Net Profit Margin
- Revenue Growth
- Aging Accounts Receivables, and
- Current Ratio.
The Balance Sheet Report shows a snap shot of the assets, liabilities and equity of a business as at a particular date. You need to see if your business is operating on a solid financial footing. A Balance Sheet can reveal whether the business is operating with too much debt, if inventory levels are too high, or if customers simply are not paying on time. Similarly to the Profit and Loss Statement, you can compare the present balances with historical results, to see how well the business is progressing financially.
The critical Statement of Cash Flows shows you where the money came from, and where it went. No matter how good at selling you are, if you don’t convert your sales into cash you will suffer significant shortfalls. While the Profit and Loss Statement tells you if you made a profit, it may include income and expenditure that hasn’t been paid yet. The Statement of Cash Flows only shows cash and is grouped into three main areas:
- Operating Activities - customer receipts and supplier payments.
- Investing Activities – proceeds from selling business assets and payments for assets.
- Financing Activities – loan repayments and loans received from a lender or business owner.
This report helps you make decisions about how to use your cash, and what areas to focus on to improve. If cash is going up, perhaps now is the time to make an investment or purchase the new company vehicle or hire staff to help increase sales. Or it may be time to pay down some debt. This report can be customised by date period and relevant accounts, and involves organising your Chart of Accounts to display accurate and meaningful information.
What else do I need Financial Statements for?
You probably already know that you need to prepare annual Financial Statements for a business tax return, and keep the records for up to seven years. Financial statements are also worth keeping as a historical record of the success of your business, should you ever want to sell the business or pitch to investors.
Your new suppliers and clients might ask to see Financial Statements when deciding whether to conduct business with your company. If you need finance quickly, e.g., for a business vehicle or home loan, being able to show professional Financial Statements will help you secure your loan more quickly and possibly negotiate a better rate and terms.
Need help? Where to start…
Now is a great time of year to get the numbers in order so you focus on your business goals and strategies. Please contact us about our Business Accounting System Health Check or to set up your new Xero or MYOB file.
We want to empower our clients to take control of their business well before tax time rolls around!