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If you’ve ever worked with a bookkeeper, you know the drill… we download your transactions, give you a call and discuss the details, making sure that we have things categorized correctly.
The reason we do this, besides prepping for that pesky tax deadline, is so that you can keep a finger on the pulse of your business with confidence, rather than simply intuition. Keeping accurate books will help you price your products accurately, let you know if you’re making or losing money—in general and on specific jobs; and let you know your cash flow—both in the short and long term—and work with bankers and investors.
There are three reports that we provde which are key to knowing EXACTLYwhere your business stands. These reports are the Income Statement (AKA P&L or Profit & Loss), the Balance Sheet, and the Cash Flow Statement. Today I’m going to share with you WHY each is important to you and what you need to be looking for in each report.
1. Income Statement (aka P-&-L, aka Profit & Loss Statement)
The P&L shows you whether you’re making money, or not; how much income is being generated, and how much you’re spending in your business. You’ll see a total of income, deduct the total expenses, then you’re left with either profit or loss, hence the report name.
The P&L is a great overview to give you evidence of the profitability of your company. A subset of that report, is the P&L Detail Report. As the name suggests, this report digs into the specifics of HOW you’re generating income (client services, products, packages) and WHAT you’re spending your money on (admin, product creation, marketing).
What you want to look for in the overview is simply — are you making more than you’re spending. In the detail report, you’ll want to review for anomolies… are you spending a LOT on networking and travel, that doesn’t seem to be increasing sales. Can expenses be associated with increased sales, or is it simply part of doing business (like internet access), or is there some area where you could save? In terms of income, could you increase your income by expanding your offerings to include something new and different?
2. Balance Sheet
The idea behind the balance sheet is quite simple: it shows you the assets and liabilities of a company, owner, and equity at a given time. In other words, they list everything the company owns and owes, everything it owns or owes, its assets, liabilities, and the owners “equity”.
An important consideration of a balance sheet is the way in which assets and liabilities are divided into short- and long-term groups. The balance sheets contain information about who owns the company and what it owes now and in the future.
Balance sheets can tell you what your account receivables are if you sell a service or merchandise on credit, and they reflect all of the liabilities, providing a snapshot of how your business is doing. Balance sheets also come in handy when determining if you need to take on more debt to grow operations or reduce the interest rate on your existing debt.
3. Cash Flow Statement
The cash flow statement shows cash coming in and going out and what the net result is over a period of time. This statement generally shows beginning cash balances, cash inflows, cash outflows and ending cash balances. In its simplest form, a cash flow statement is presented in the following format:
- Beginning cash balance
- Plus cash inflows
- Minus cash outflows
- Equals ending cash balance.
Essentially with this report, you want to ensure that you have enough cash coming in to cover the payments going out. During your next call with your bookkeeper, I invite you to pull out the reports and ask yourself, and them, what stands out for you. Are there opportunities for increasing income or decreasing expenses? What doesn’t make sense to you on the report?
As an entrepreneur, you are probably already spreading yourself too thin, and shouldn’t spend your time trying to do everything. That’s why we recommend getting assistance understanding, analyzing, and managing your books and reports.
If you want support in creating a budget, getting a better read on your finances, or analyzing your financial statements, we’d love to have a chat with you. Reach out by phone at 855-774-3330 or check out the details at the VirtualMoneyCoach.ca or MoneyCoachUSA.com
