In order to be aware of how well/bad your business is doing, as a business owner you need to be able to understand your financial reports and what they represent. It doesn’t do to just keep trading and hope for the best.
One of my former clients was a family run business. The wife handled the office administration while the husband ran the operations. She could never understand why their business always struggling financially. She knew that there was something fundamentally wrong with what they were doing but couldn’t pinpoint exactly what. Meanwhile, the husband disagreed as he was of the mentality that there was money coming in on a daily basis so the business was doing just fine.
Once we got their books in order, using their financial reports we were able to determine that while they were indeed getting the money in, the markup on their products was just enough to cover their running costs. So even though the business was turning over close to a million dollars, because they had such high overheads (rent, utilities etc), what was left at the end of the day after the bills were paid wasn’t much. Without the P&L, they would never have known what they were doing wrong.
So what reports are the most important for a business owner to know? There are 3 main financial reports that anyone running a business should know. They are:
- Profit and Loss – a report that tells you how your business is doing. It shows if the business made a profit or lost money in a given period of time.
- Balance Sheet – a report that’s a snapshot of a business’ assets and its debt at any point in time.
- Cashflow statement – a report showing the inflows and outflows of cash in a business.
The better one understands these reports, the better they can manage their business and identify any problems.
Next Post: How to understand the Profit and Loss report in more detail