“Hope is not a financial plan.” – Ric Edelman
There are a few things in life that just make sense –– the warmth of a campfire on a cool autumn night, peanut butter and chocolate, snuggle time with your dog… Whatever our opinions are of these things, they are firm and confident, they usually are associated with feelings of comfort and joy. We’ve all been warmed by the glow of a fire, whether or not we enjoy chocolate and peanut butter, we’re familiar with the taste, and being your dogs “human”, well, that’s an important job…
Financial reports, however, are not inherently familiar, nor are they associated with feelings of comfort and joy. We’re not accustomed to pouring over balance sheets or comparing budgeted expenses to actual expenses. Phrases like “cash flow forecast” and “gross margin” can bring with them a sense of dismay and helplessness to business owners.
- I just don’t have the time to look it over.
- I won’t ever understand any of this.
- I don’t want to admit to anyone that I don’t understand it.
I’ve heard all of those remarks time and time again. And today I’m here to tell you that it IS possible to understand this side of your business. You’ll GET through these details much faster. You WILL identify who you need to talk to about financial reports. And you WILL most certainly have a clearer understanding of financial reports as a whole. And MOST importantly you do need to have a basic understanding of these reports, not only for profit, but to set your financial goals.
Now, first and foremost, a disclaimer. This post was written solely for general informational purposes and is not intended to provide, and should not be relied on for, accounting, business, financial, investment, legal, tax, or any other professional advice or services. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional advisor (for example, a Certified Public Accountant or a Financial Planner).
And, now, to business. Before we dive into the details that make up financial reports, we need to know why they matter. At their core, financial reports make up the path that leads to success in your business. When they’re understood, they become more than reports with numbers. They transform your business’s financial records into a tangible story. More importantly, they empower you to take charge of your business in ways you couldn’t have possibly imagined.
As a whole, there are three reports that hold the keys to understanding your business –– Profit & Loss, Balance Sheet, and Statement of Cash Flows. Each report provides insight to a different part of your business’s financial story. Where one report provides detailed information about your monthly income and expenses, another answers questions about your assets and liabilities and the third shows your cash peaks and valleys over the course of a month. Think you only need to understand one? Not so. All three go hand-in-hand, and maintaining all three on a monthly basis will serve you and your business well.
Take the Profit & Loss (P&L) report, for instance. Of the three key reports, this report shows the revenue and expenses by clearly displaying how much money you made (revenue) and what it cost to make that money (expenses). Want to know where all your money went in a month? The P&L is your report. Want to compare how your business faired this month to last month? Or this quarter to the same time period last year? Yup, the P&L. It’s your financial buddy for so many reasons.
Of course, in addition to knowing what you earned and spent, you’ll also want to know your balances – cash accounts, credit card, loan, assets, etc. Hence, the Balance Sheet. The Balance Sheet speaks to your assets (cash, A/R, equipment), your liabilities (credit card debt, loans, A/P) and your equity (your investment in your business). While the P&L displays what your business earns & spends, the Balance Sheet shows what your business is worth. That’s information you’ll want to have and to know is accurate.
At this point you are digging on the P&L and you are in sync with your Balance Sheet. Let’s make it the financial report trifecta and tackle the Statement of Cash Flows.
Your Statement of Cash Flow allows you to identify future financial obstacles based on past trends. By reviewing this report you can garner expectations of what cash flow will be like and plan accordingly. Knowing when your cash will ebb and flow will enable you to prepare ahead of time. .
So what do all three reports have in common? Not only are they great tools for managing your business but bankers and investors are much more likely to lend you money if they can see your business’s strong financial position through accurate and up-to-date reports. With updated reports you put your business in the best position to be prepared for growth.
All in all, business finances do not have to be an abstract concept veiled in numbers and a confusing language. Best practices include leveraging financial software like Quickbooks, Zero, or Sage to your best advantage. If you track your income and expenses in your accounting software application on a regular basis, the software will do the heavy lifting for you. You got this.I promise!
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