What To Expect From Two Essential Financial Statements

As a business owner, you get to take a look at the financial statements every once in a while because it is part and parcel of managing your business finances. The financial statements have a lot to tell you including how your business is performing financially. You will also know why your business is making money or losing it. These statements also help your financial planners, bookkeepers and advisors analyse the figures. There are 2 key financial statements that are commonly used for your business: the Profit & Loss and Balance Sheet.

Profit & Loss

A Profit & Loss Report refers to a summary of your business expenses and income at a specific period of time. It provides you an idea of your business’ performance. The data you will usually find in a Profit & Loss Report include Cost of Goods Sold, Equals Gross Profit, Expenses, Operating Profit, Tax Payable and Net Profit.

Although they may seem easy to interpret, you need to develop specialized skills so you can determine what the figures say. Unfortunately, this essential financial statement is not often understood by some business owners. The Gross Profit Margin is the gross profit over sales and this is usually presented in percentage. This margin is essential for tracking so you can ensure that profitability is improved and maintained. The Gross Profit Margin also allows you to compare your figures with competitors.

If there is a decrease in Gross Profit Margin, it only means there is a rise in inventory cost, heavy discounting and many more. The Net Profit Margin can also be measured as a percentage and this is referred to as net profit over sales. If you notice any decrease in your Net Profit, it means you are paying more in your expenses.

It is necessary that a Profit & Loss Report is prepared on a monthly basis because this practice enables you to perform regular analysis of your expenses and income. You will also be able to know your key business drivers. As you master the skill of reading a Profit & Loss Report, start planning how your business can keep up with competitors.

Balance Sheet

A Balance Sheet is another important statement that business owners should not miss out on checking because it demonstrates the financial strength and net worth of your business. In a Balance Sheet, you will be able to see the assets, liabilities and equity or net worth.

The assets refer to the tangible and non-tangible items that your business owns. The liabilities are the amounts you owe to other parties. The difference when assets are subtracted from liabilities is referred to as equity or net worth. The Balance Sheet helps you identify the key performance indicators such as control of working capital, financial strength, return on equity and return on capital. A Balance Sheet may be harder to interpret than a Profit & Loss Report because of all the technical terms you can find in it. This is why you need to make sure that key areas are not missed such as the Current Assets and Current Liabilities. You should also pay close attention to the amounts on your Balance sheet as they can assist you in making a decision and cash-flow.

Andrew Donnelly

Written by : Andrew Donnelly

Andrew Donnelly is a degree qualified accountant and registered tax agent. He is the principal of Brisbane Bookkeepers, which provides bookkeeping services to small businesses in Brisbane and its immediate surrounds.

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