You can’t afford to get this wrong…
Business owners have lost the chance of lucrative investments and partnerships due to not having up-to-date books readily available. In the fast-paced, competitive world of business saying “I will have to get back to you on that some other time…” simply doesn’t cut it. This suggests that you aren’t organized or lack a robust team.
There are 5 financial reports which your bookkeeper should be providing to you on a frequent basis. Put together, they give you…
-… a detailed understanding of your company’s financial position.
-… areas of efficiency.
-… opportunities for growth.
Consequently, a bookkeeper can make or break the business you worked so hard to build.
Let’s delve into the 5 financial reports your bookkeeper should be providing you.
Profit and loss statement
The P&L statement gives an overview of revenue, costs and profit. As a result, you can see whether your company is growing, and can take actions if not. This report can be shared between the management team, shareholders and potential investors so that they can quickly deduce the financial health of the company. Plus, it allows projections to be made.
It is worth receiving a P&L statement from your bookkeeper on a month-to-month basis. It is critical for keeping the company on track at meeting financial goals, and also ensuring that you are organized during tax season. An error on the P&L statement can create legal issues with tax collectors, and/or skew growth rate. Some argue that this is the most important report.
Balance sheet
This document is a way of tracking your company’s earnings, liabilities, assets and equity. Here is a quick breakdown of each term.
Assets- This is any item your business owns outright.
Liabilities- This is what you owe to other businesses and creditors.
Equity- This details the amount owned by shareholders.
The balance sheet is critical for understanding the financial runway of your company. As a result, you have a good idea of how much money you have in order to pay your liabilities and keep the business running. Therefore, if the ratio of assets to liabilities goes below a 1:1 ratio, you can quickly take action in order to improve the financial standing of your business.
Moreover, banks have a keen interest in the balance sheet. It gives them a good idea as to whether your business would be able to keep up repayments on a loan. Interestingly, banks tend to give out loans to companies with a healthy balance sheet and need finance in order to accelerate growth.
Ensure that your bookkeeper provides you with a balance sheet on a regular basis -for instance, once a month- so that you can present it at a moment’s notice.
Statement of Cash Flow
This breaks down how much cash enters and leaves your business. You can track this over the course of a year in order to see your best month, and whether you need to take certain actions in certain months. Moreover, it allows you to see whether you can keep up with debt repayments.
The cashflow statement is split into three sections.
1) Operating activities
This section details your income statement, and records accounts such as; inventory, wages, income taxes owed, accounts payable and accounts receivable.
2) Financing activities
This section details the transactions in stockholders equity and long-term liabilities accounts. This is of particular interest to potential investors.
3) Investing activities
Any purchase or sale of short to long-term investments will come under this section. For example: property is a long-term investment while printing paper is a short-term one.
The cashflow statement is critical for determining whether you can keep up with fixed costs such as wages. Moreover, if there is much more money coming in than going out, it helps make a decision on whether you can afford to expand.
Accounts receivable
This is simply cash to be received by a customer. For instance, let’s say you recently completed a service for one of your customers; however, they are yet to pay you part or all of the money. This expected payment can be classified as accounts receivable.
Accounts receivable is important because in addition to cashflow, it allows you to see the financial health of your business. Moreover, you can use the historical data of accounts receivable to tweak certain processes, such as the way you structure contracts with customer. Plus if the data shows that you are paid late on a consistent basis, you might offer a payment plan or offer customers financing. The latter option ensures that you are paid on time. Furthermore, that might be the point whereby you review the payment options available to customers. Ask yourself whether you are offering enough.
Interestingly, customers are more likely to pay on time if they are given a bonus (discount, gift or loyalty point) for doing so. On the other hand, you might include a late payment fee into your terms in order to encourage prompt payment.
Key Performance Metrics
A fundamental part of growing any business lies in setting quantifiable goals, and reviewing at set times during the year in order to analyze whether you are on track. You can use quantifiable goals to set qualitative ones. It also brings your team together under one common purpose, and allows for delegation of responsibilities. Companies typically fail because they reduce the focus on their key performance metrics.
A key performance metrics has to be quantitative, time-bound, actionable, realistic, and directional. Moreover, the KPM has to be under your locus of control. Outside influences shouldn’t be able to affect with your ability to take action on them.
When every member of your team is working hard at hitting or exceeding your key performance metrics wonderful things can happen for your business.
As you can see, these 5 financial reports are vital for the efficient running and growth of your business. Therefore, it is essential that your bookkeeper provides them on a monthly basis. They form the foundation which your business processes are run on.
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