The Financial Health of Your Business At a Glance – Part 2
Financial Health – Part 2
This is the second of the two articles we, as your certified chartered accountant, have written to you to help with the understanding of the “ins and outs” of financial management for your business.
In this article we take a look at two more financial tools or rather reports that give you a good handle on what is happening to your organisation over time.
By-the-way, Financial Health – Part 1, dealt with the need for a business plan and the associated budget plus the cash flow statement. If you would like to read this article please click here.
1. Are you really ahead of the game?
Bank statements, or rather cash flow statements, give a historical picture on the viability or health of the firm. What is lacking is a forecast on what is coming your way from one month to the next. This is where accrual accounting is a great help.
Accrual accounting records when an invoice is sent or received as in when a sale or purchase is made. Whereas, the cash flow statement is about when money is paid or received.
Accrual accounting is used in the preparation of the Profit and Loss Statement. The P & L statement has several names all meaning the same thing (statement of financial performance, Income and expenditure statement, statement of earnings or income statement). Basically the report shows income and expenditure along with the resulting profit or loss for a specific accounting period.
The information displayed relates to income and expenditure from all activities – operating and non-operating (e.g., sale of assets, interest payments, and depreciation).
The P & L statement shows whether you are making a profit or a loss for a given period. It is best read in conjunction with the cash flow statements to gain an accurate picture on the health of your business. These two reports help determine if action is required to boost the viability of the firm.
If you would like a hand with working out what this all means for the firm, then please do pick up the phone for a discussion:
Ben 022 043 1199
2. Balancing on the Edge
There’s one final report that you need to have an appreciation of, it’s the balance sheet. A balance sheet is a summary of all assets and liabilities (read what the firm owns vs what the firm owes). The statement of financial position (the alternative name for a balance sheet) is taken at a particular point in time comparing this period with the same time last year.
Assets = Liabilities + Owner’s Equity
This information is used to help determine the areas the firm might wish to work on to create a bigger bottom line. Traditionally, a balance sheet is produced annually. Given todays accounting packages, I recommend you should have one created if not monthly, at the very least, every quarter to help with adjusting the business to better meet the demands of the ever changing marketplace.
Like a hand to set up your accounting package to produce such a report, or for us to produce such a report, with I might add, an analysis,
then I’m only a phone call away:
Ben 022 043 1199
3. A Bonus – the Variance Report
A variance report is usually associated with the profit and loss statement, although some (small) firms that focus on cash flow statements may associate a variance report with their cash flow statement. Either way, the report looks at significant variations between actual and planned income and expenditure and the accountant preparing the report, provides a comment as to why there is such a variation and what might be done to capitalise on or mitigate matters. Most helpful in understanding just what is going on in the firm from a financial perspective (along with the other financial reports referred to in this series).
What are The Reports Saying?
Understanding just what the monthly reports or statements show, can be tricky, not to mention time consuming. If you would like a hand with the implications of your financial reports or are considering moving from a bookkeeper or an accountant, I’d be pleased to have a chat either in person, or over the phone, especially for those whose organisation’s financial year ends this December.
Contact us today for an initial, free consultation about how to migrate your accounts to a cloud based accounting service. It’s what we do.