Running your business and making decisions based on your bank balance is not an effective business strategy. What is effective is a business plan along with an understanding of the three most important financial reports in your business.
These financial reports are the cash flow statement, the profit and loss statement and the balance sheet.
1. Cash Flow Statement
A cash flow statement measures the cash generated, or used, by a business in a given time period and is divided into three main sections: operating activities, investing activities and financing activities. The purpose of a cash flow statement is to show how and where a business is spending its cash.
Cash flow from operating activities is the cash on the “bottom line”. It is the transactions of a business when doing business. For example if you are a retailer you sell stock, if you are a doctor you provide services and if you are a manufacturer, you produce goods.
Cash flow from investing activities is the cash used to purchase, or sell, the capital assets of a business. For example the purchase of plant and equipment, or the sale of your factory, is considered an investing activity.
Cash flow from financing activities is what typically funds the operations of the business. Cash used to repay creditors, cash received from loans and any dividends paid to shareholders are outlined in this section.
2. Profit and Loss Statement
The profit and loss statement summarises the revenue and expenses of your business over a given time period. It is also known as an income statement. This report is divided into three sections: revenue, expenses and net income or profit. To put it simply:
- revenue – expenses = net income or profit
The profit and loss statement can be used to measure gross profit margin, net profit margin and operating ratio.
The profit and loss statement is not the same as the cash flow statement. A business can look profitable on the profit and loss statement but not be generating cash flow and vice versa.
3. Balance Sheet
The balance sheet is the third financial report that is invaluable in any business. It summarises what your business owns, what your business owes and the current value of your business to its owners.
To be “balanced” the assets you own must be balanced against any money you owe. The balance sheet provides insight into the operations of your business and its overall performance.
How Can We Help?
Understanding key financial data can be complicated. Through our business advisory services we can help you to interpret your financial data so that you can make smart business decisions to grow your business. Give us a call to see how we can tailor a service that is right for you.