If you're a small business owner, you want to make sure your business is a profitable enterprise. You want to know how much cash your business is generating and how far you can extend yourself in credit with your vendors and suppliers. You'd like to have a snapshot or overview of your business performance to aid in negotiating for more funds from bankers to expand your activities. Business reporting is therefore a critical facet of running a small business.
Profit and Loss Account
The primary business report that you need at the end of every month, depending on the volume of activity, is the monthly profit and loss account or statement. This is prepared for a one month period in the case of monthly accounts and a three month period in the case of quarterly accounts. The profit and loss account shows how your sales or revenue is converted to the net profit.
Revenue is the amount of sales that you've made to your customers. The revenue figure will be a net figure after accounting for sales discounts and any allowances that you have afforded your customers. Each sale will be supported by a customer invoice that details that type of product sold or services rendered and the corresponding value. A gross profit figure is arrived at after deducting the costs directly attributed to the sales. A gross profit margin is arrived at by dividing the gross profit with the sales figure - this will show the percentage of profit earned from sales to customers.
The expenses reflected in the profit and loss account are the expenditure that you have incurred in the course of your business operations and which are attributable to the business activities. These include general and administrative expenses such as insurance, utilities and salaries. Such expenditure is necessary to manage your business. There will also be selling expenses such as travelling, commissions and advertising that have been incurred to sell your products or services.
The net profit figure is the total profit that your business made after deducting all the relevant expenditure. This is the figure that actually determines the profitability or otherwise of your business. If your business made losses, you are able to determine from an analysis of your expenses in the profit and loss account which of your expenses was a major contributor to your loss. High net profits may predict strong future profits for your business. You can also assess whether or not your business will be able to generate sufficient cash flow in the future from a review of your profit and loss account.
Balance Sheet
A bookkeeper will prepare the balance sheet after completing the profit and loss account. The balance sheet is a snapshot of the financial position of your business at a specific point in time. In monthly accounts, the balance sheet date will be the last date of the month and shows the financial position of the business as at that date. At the financial year end, the balance sheet will reflect the financial condition of the business on last day of the financial year.
The balance sheet is a summary of the balances in your business. It gives the breakdown of assets and liabilities in your business as well as your equity, as the business owner. The net worth of your business is denoted by the equity figure. This is actually derived by subtracting all the liabilities from the assets. Showing the net worth of the company is the primary function of the balance sheet.
The balance sheet can be presented in a format that shows the assets on one column with the liabilities and equities on the corresponding column. Both the columns will then be equal in value, or balance. This gives rise to the balance sheet term. Contemporary balance sheets are presented in a single vertical section for many businesses with the assets recorded first followed by the liabilities and equity.
Cash Flow Statement
The periodic accounting statements that your bookkeeper prepares must include a cash flow statement. This crucial statement shows the movement of cash into, and outside of, your business. The cash into your business comes from your customers who have paid for products bought or services received. The cash outflow is primarily due to payment of trade and other creditors. A net inflow of cash indicates that your business is liquid.
Even if your business is profitable and shows a strong net profit figure in your profit and loss account, if you don't have enough positive cash flow then you run the risk of business failure or bankruptcy. You won't be able to service your debts as they fall due. Cash shortages are a red flag and demand immediate attention. If your business is hemorrhaging cash, your bookkeeper will be able to point this out to you from the cash flow statement. You can discuss ways of stemming the cash outflow perhaps through buying your equipment instead of leasing them.
With a cash flow analysis, you can determine if you need to speed up your customers in settling their debts. You would be able to negotiate longer credit periods with your suppliers to lag payments to trade creditors. In fact you can obtain an excellent understanding of the cash flow situation of your business and take steps to adequately manage cash to remain both liquid and profitable.
Business reporting encompasses the financial statements which are critical for the efficient running of your small business. Three very important financial statements are the profit and loss account, the balance sheet and the cash flow statement. Bookkeeping Central provides comprehensive accounting services through the services of bookkeepers for small businesses. Your business will be far better managed with accurate bookkeeping services that are timely and cost effective. By using the professional expertise available at Bookkeeping Central, your business will benefit from accurate periodic financial statements that provide you with critical information about the profitability and liquidity of your enterprise. With a great bookkeeping partnership, your small business is assured of accounting and financial reporting.
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