The Financial Reports Every Small Business Needs to Understand

When you’re working in the business and on the business at the same time, finding a few hours to understand the various financial reports your accounting platform spits out isn’t easy.

#1 Profit and Loss

Also known as a P & L report, your profit and loss statement shows you instantly how your business is really doing. Some people call it a ‘bottom line’ report.

If you use an accounting platform like Xero or MYOB, you can get a P & L report for a month, a quarter or a year – or just enter a date range. Within the report is a summary of income, such as professional fees (sales) and interest received, and a list of operating expenses.

It’s always interesting to compare P & L reports from previous years, to see what expenses have increased and which have reduced. If you’re looking at trimming some costs, your operating expenses summary provides essential information about how much you’re spending and on what. And of course, you can see how things are tracking compared to previous years.

Regularly viewing your P & L report helps with forecasting. You can spot income and expenditure trends and work out what the future looks like. Also, you can see problems quickly and deal with them before they get too big.

#2 Balance sheet

Your balance sheet report shows what you have and what you owe. You’ll see a list of current assets, such as accounts receivables, provisional tax paid, tax refunds and terminal tax. There’s also a list of fixed assets – vehicles, plant and equipment and depreciation. These represent your company’s resources. Generally, assets are reported at their cost or a lower amount.

In the liabilities list, you’ll see things like outstanding balances for credit cards and GST. Then there’s the equity list, which shows current year earnings, dividends, drawings, fringe benefits tax interest, donations and shareholder salaries.

Ideally, the difference between what you have and what you owe should be a positive number, unless you’re a start-up. If you’re right at the beginning of your business’s life, it might take a while to see a healthy balance sheet.

#3 Aged receivables

This report shows you who owes you, how much they owe you and when it was invoiced. In a perfect world, the only column with figures in it will be for the most recent batch of invoices.  All the other columns should be full of zeros. But if you have clients who are slow to pay, you’ll clearly see what they owe you and when it was invoiced.

From this report, you can decide whether you need to give some clients a ‘hurry up and pay’ message. Or, if you’ve already done that a couple of times, it will indicate whether you need to call on the services of a debt collection agency.  It’s good to develop a policy about how long you’ll let receivables slide before you take action.

#4 Aged payables

Obviously, this is the opposite of aged receivables. It shows how much you owe and to whom, however, it does depend on you remembering to enter every invoice into your accounting system. Balances that are up to 30 days old are considered current balances. Aged balances are amounts owed for more than 30 days.

It’s good to get into the habit of entering invoices as they arrive – for supplies, inventory and services your company receives.

#5 Revenue by customer (income by contact)

Being able to quickly identify your most valuable customers is important. In your mind, this might be different from the fact – so running a revenue by customer report can be revealing. If you’re using Xero, an ‘income by contact’ report will show you who matters most in your client list. If you’re using MYOB, a sales report will do the job.

As well as the amount of income generated from each customer, look at who gives you consistent business. They are also VIPs for your business future.

If you discover that much of your revenue is coming from one or two customers, consider finding some additional customers so that all your eggs aren’t in one basket. Having most of your income streaming in from the same customer all the time is a risk factor; if they go away, so does your business.

As you grow your small business it’s important to make sure that you are covered from all angles; this includes insurance cover. For more information and business insurance options visit www.state.co.nz/business