When I wrote my 10 Steps to building a better business, I mentioned both continuous learning and monitoring your progress, and a big part of that is understanding the health of your business, which means knowing your numbers.
Let’s be honest though, you started your business to do what you love, not to spend hours looking at numbers. Isn’t that why you have an accountant? To take care of all that for you?
And you’re absolutely right, that’s why we’re here. Reviewing reports, creating forecasts and pulling together business plans or cash flow forecasts is what we love doing best!
But that doesn’t mean you get to forget your finances altogether.
As a business owner, you should set aside time every month to do some essential financial checks - even if you have a bookkeeper or accountant.
So what exactly should you be looking at?
3 Key Financial Reports to Review
The best way to get an overview of your business’s finances each month is to look at these three main financial reports.
Profit & Loss
Balance Sheet
Cash Flow
You can easily pull them directly from Xero - or speak to us about creating them for you.
Great, so now you know which reports to review, what exactly do they tell you?
Profit and Loss Report
A Profit & Loss (or P&L) can be run for a month or a year and shows you your income and expenses, by account code. So exactly what brought money into your business and how much was spent and where. At the end of the report it also tells you, as the name suggests, if you were profitable in the period you have selected, or if you operated at a loss.
A P&L can help you make decisions around where to grow your business based on your sales, or if you need to cut costs to improve your profitability, where that might be possible.
By selecting a number of comparison periods you can also use the report to identify business trends in both income and expenses. This in invaluable when it comes to planning and forecasting.
Balance Sheet
The balance sheet is a bit more complicated. It ‘s a snapshot in time of the value of your business based on your Assets and Liabilities.
The main formula behind a balance sheet is: Assets = Liabilities + Shareholders' Equity
In Xero it is shown as Net Assets = Equity.
This means that your business’s assets (which can be cash at the bank, plant and property you use to run your business, etc) are balanced by it’s liabilities (any money your business owes to finance companies, banks, IRD, suppliers, etc) and equity (which is the money initially invested in the business plus any retained earnings)
Your Balance Sheet is a good place to see your financial obligations - including Tax. So at least once a month you should be looking to check what you owe IRD in terms of GST, PAYE (if you have employees) and Income Tax. And you can also see in your Balance Sheet if you have enough cash in the bank to meet these obligations.
Cash Flow Statement
Cash flow is very different to profit. Many people, even business owners, assume a profitable business must have good cashflow but this is simply not the case. A business can realise a profit and still struggle with cashflow – if for example the business relies on costly assets (such as machinery and vehicles) or if it suffers from high aged receivables.
Your cash flow statement tracks how much actual cash the business earned (it doesn’t include projected income such as unpaid invoices etc.) This is essential to understand how much money you actually have in the bank at a given time.
Set aside time every month to review these key financial reports. That way you see how healthy your business is, make smart business decisions day to day and stay on track to smash those all important business goals you set.
If you need any help understanding these reports come and see me!
