Financial statements need not create anxiety and fear.
Not everyone is an accountant or financial expert, but you, as the business owner, need to have enough understanding of the numbers to make sound financial decisions.
What are financial statements?
Financial statements are a representation of the health of your business at any point in time. Some of these statements forecast what you can expect to happen in the future.
Information from financial statements empowers you to make good decisions based on the actual history of your business and the forecasts for the future.
There are some financial statements required by law, such as the income statement and balance sheet. There are also voluntary financial statements which are crucial to good decision making, such as the cash flow statement and budgets.
What is an income statement?
An income statement reflects the trading results of your business for a specified period of time, and can be reflected annually or monthly.
It is important to remember that income statements are a record of historical data.
You record your business’ income, cost of sale (CoS), variable expenses and fixed expenses, and they combine to reflect your business’ profitability through the key indicators of Gross Profit (GP) and Net Profit (NP).
If you prepare an income statement that presents monthly figures, you will be able to establish trends in your business finances, and track how your business has performed over a number of months.
At the end of each financial year – which is usually linked to the tax year - you will be required to produce an annual income statement to the Receiver of Revenue.
What is a balance sheet?
The balance sheet is often referred to as a snapshot of your business at any point in time.
It reflects your assets and liabilities on a certain date, and is an indicator of the solvency and liquidity of your business.
When you analyse the Assets and Liabilities monthly, always keeping the past in view, you will be able to forecast whether these indicators - or ratios - are likely to improve or deteriorate in future. See next week’s Blog post about ratios.
Accountants study for years, and practice their profession every day. You are not expected to be an accountant, but you must be able to understand some business basics. You are also allowed to ask for help.
To learn more about your business’ financial health, contact The Springboard Academy for expert advice.