Successful business owners review their financial reports on a regular basis. Small business owners can put in place systems and procedures to obtain the same benefits that the big companies get from having a regular monthly management report and meeting with key stakeholders.
There are 3 key reports that business owners must understand and review regularly. They are:
1. Profit and Loss Statement. This is a summary of the income and expenses for a period of time. The report should be reviewed monthly with the figures showing each months’ details and year to date totals. At the end of each quarter, it is also interesting to review the quarterly figures and compare against previous quarters results.
The profit and loss statement shows income earned. That is, it shows all the income for invoices you have issued, irrespective of whether you have received payment. Similarly, if you enter all your expenses when you get the invoices and pay them at a later date, all the expenses will be included even though you may not have paid them yet.
Where many people get confused, is understanding that this report usually has no correlation with the cashflow of the business, unless your business is totally run on a cash basis. Rather this report shows you whether you are making money or not based on the activity of the business during the period.
2. Cashflow Statement for the past period. This is a summary of money received and payments made during the period. This may include loans received as well as income, and will include loan repayments and capital purchases in addition to the expenses of the business. The cashflow statement will also include payments for GST and Pay As You Go Withholding on wages which are often paid only once a quarter and thus will have a significant impact on the cash balance every 3 months.
3. Cashflow projection. This is an estimate of the upcoming cashflow for the future. The projection should be for 3 months and in detail, week by week. This report is harder to compile as it requires taking a best guess on when you will receive payment of your invoices. Payment of expenses and loan repayments and other commitments is easier to plot in week by week based on the due dates for payments. This report is vital as it shows whether you have sufficient funds to pay your bills on time and if you have a period of time where you expect to have a shortfall. Knowing that you have a potential cash shortfall in the future, gives you time to find ways to either get paid earlier, find new avenues of revenue, or have time to consider whether you can seek funding from an alternative source to help you over that specific time period.
All three reports should be reviewed monthly, with the cashflow projection checked on a weekly basis to make sure that you are on track and, if not, to take action, knowing what the future may hold.