Do your eyes glaze over when your accountant hands over your yearly financials? Yearly financial statements provide important information but if you only use them for compliance and to keep the tax man away, you don’t understand them or you rely solely on them to guide your decisions you are probably only seeing part of the financial puzzle. Understanding your financial statements are crucial.
Here’s what you need to do to see the whole picture and extract the important information that will provide value and allow you to make informed business decisions.
Financials are historical
Your yearly financials show you the history of your business but depending on when you get your financial work completed it can nearly be two years old. In the context of the modern business world that is just too long a time frame to be able to act upon meaningfully. Understanding your financial statements and the value they offer is extremely important for a business of any size.
To find out what’s happening in your business right now you need to prepare regular interim accounts. Thrive Advice uses Low-cost accounting software with live bank feeds, such as Xero which makes preparing interim accounts a breeze.
Prepare a profit and loss budget and a cash-flow forecast. A profit and loss budget is your map to where you want your business to go. Comparing your actual performance with the budget helps identify where you are doing well, allowing you to capitalise and what areas you need to focus on and improve to get you back on track to having a successful thriving business.
They come too late
Many business owners put off the preparation of the annual financial statements as long as possible which means getting the information together can be an arduous and time-consuming chore.
Some put it off because they don’t see the value and therefore don’t want to spend the money, others because they are time-poor.
However, your annual financial statements should be prepared as soon as possible at year-end, especially if the annual financial statements are the only financial reporting available.
- Get organised by identifying accounts receivable/payable, work in progress and inventory.
- Mark it in your diary!
- Have your accountant make an early start to achieve the best results for you and your business – you want to be proactive, not reactive!
They don’t reflect cash flow
It’s common for business owners to say that the annual financials must be wrong because they show a healthy profit and tax payable despite the fact that there is little to no cash in the bank. This is due to two main factors;
- The cash hasn’t been collected yet from those who owe it to you
- You have already spent the cash no loan repayments, assets or drawings
Neither of the above factors are taken into consideration when preparing your profit and loss statements.
This is why you need the annual financial statements to include a cash flow statement. This will show you how the money was generated and how in turn it was spent.
They are too complex
Accountants love details but not everyone else does! As a small business owner you put your trust in your accountant to give you the information you need, this is why not all business owners need all the details! The sheer amount of information can be overwhelming for small business owners because it becomes difficult to identify the relevant numbers. Understanding your financial statements can help you identify the information you need and the questions you need to ask.
- Ask questions! No question is a silly question, especially when it comes to your livelihood!
- Take notes – turn up to the meeting with your accountant with a load of questions and leave with a load of answers.
- Make it a priority to develop your relationship with your accountant to grow your understanding of the financial health of your business.
They don’t contain the details you need
Be clear about which numbers are driving your business or holding you back.
Seek the numbers that will improve your business and help you avoid the mistakes of the past.
Many small business owners struggle to truly understand and interpret the critical numbers that drive revenue, profitability and cash flow in their business. There are two basic ways to improve profitability in any business:
- Reduce costs
- Increase revenue
Thrive Advice prefer to focus more on increasing revenue. “In our experience, you can increase revenue and profitability in most businesses by increasing one or more of the following: the number of customers, the number of times they buy and the amount they hand over each time they buy.” `Andrew Miller, Partner, Thrive Advice.
- To make better business decisions and maintain profitability you need to analyse your performance in detail and monitor your key performance indicators, neither of which would be achieved by preparing your annual financials.
- In summary, your financial statements should be the starting point for analysing and improving your business
Let us help you set new targets to achieve and determine the best strategies to get from where you are now to where you want to be.
Plan. Do. Thrive.