If I told you there was a way to see into the future would you believe me? My guess is probably not! And though I can't tell you what life will be like a year from now, I can show you the 5 financial reports that provide a glimpse into your business' future.
1. Profit and Loss Statement (P&L)
Also called the Income Statement, the P&L shows revenue minus expenses, giving you your net income for a certain period of time.
How to use it - The profit and loss statement is a great tool if you want to get a quick snapshot of how your company is performing. Did you stay within budget last month? What division is bringing in the most revenue this quarter? The P&L statement should be reviewed at the very least on a monthly basis.
2. Cash Flow Statement
The cash flow statement gives detailed information on the cash transactions your business incurred during a certain time period.
How to use it - Many small businesses have a positive net income number on the P&L statement, yet see their cash on hand decreasing. The cash flow statement will explain why. It will show how cash flows in and out of the business. Often times, high debt obligations, such as equipment and vehicle payments, are the reason for a positive net income number yet decreasing bank balance.
3. Balance Sheet
The balance sheet shows what your business is worth at a given point in time.
How to use it - The balance sheet is the place to find all of your assets and liabilities. Line items such as notes payable and current liabilities show the total debt your company owes. You want to use the balance sheet to see how your business is trending. Are you taking on more debt to increase sales or are you paying off your liabilities increasing equity in the company.
4. Receivables Report
This report shows who owes money, how much they owe and the age of their debt.
How to use it - Look to see if total accounts receivable is increasing or decreasing over time. If it steadily rises, your customers are not as credit worthy as they once were. Evaluate your credit policy and adjust as necessary.
5. Payables Report
This report is a quick summary of who you owe money to that you have not paid yet.
How to use it - See if there is any debt past 30 days. If there is, you are likely overdue on those accounts. Set a certain day of the week apart to pay bills. Consistency with vendors will go a long way when it comes to negotiating discounts.
According to numerous surveys, the number one reason small businesses fail is due to cash flow issues, which are directly related to an owner not staying on top of the numbers and poor accounting practices. Take the time each month to review your numbers and stay informed on how your business is performing. If you need assistance with understanding your financial statements, schedule and appoint with us today!
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