Understanding financial reports is important to your business because they are more than just numbers. Financial reports can provide you with important information about your business’s health and performance. Through reviewing these reports, you can identify issues to avoid potential risks, see areas for expansion, and make well-informed decisions.
The Profit and Loss Statement (P&L)
Also known as the income statement, this report shows your revenue, expenses, and net profit over a specific period. Key takeaways from the P&L include:
- Revenue Trends: Are your sales increasing or decreasing?
- Expense Management: Are costs growing too quickly compared to revenue?
- Profitability: Is your business making a profit, and if so, is it sustainable?
The Balance Sheet
This report provides a snapshot of your business’s financial position at a given moment. It consists of three main components:
- Assets: What your business owns (cash, inventory, equipment, receivables).
- Liabilities: What your business owes (loans, accounts payable, outstanding debts).
- Equity: The owner’s stake in the business after liabilities are subtracted from assets. Understanding your balance sheet helps you assess financial stability and make strategic decisions.
The Cash Flow Statement
Your business’s cash flow is the movement of money it receives and spends. While the P&L accounts for non-cash items such as depreciation, the cash flow statement solely considers real cash activities.
There are three sections:
- Operation Activities: Money made or spent in day-to-day business functions.
- Investing Activities: Money gained or lost through investments and assets.
- Financing Activities: Money movement from borrowing, loan repayments, or investments made by shareholders. With healthy cash flow, your business can handle costs and fund growth initiatives.
Financial Reports and Key Performance Indicators (KPIs)
When combined with key performance indicators, financial reports are even more effective.
These are the KPI’s to watch:
- Gross Profit Margin: It determines how profitable a business is before accounting for expenses.
- Profit Margin: The proportion of income that becomes profit.
- Current Ratio: Comparison between current assets and liabilities (liquidity of the business).
- Accounts Receivable Turnover: Measures your efficiency in gathering payments from clients.
How a Bookkeeper Can Help You Understand Financial Reports
Besides making sure your financial reports are correct, a professional bookkeeper can help you understand them. Understanding financial reports will enable you to make proactive decisions that benefit your business.
Positive Traction Bookkeeping assists companies in converting financial data into practical insights. Reach out today for a clearer view of your business’s financial well-being.