Post-COVID, businesses across Melbourne are forced to adapt to a rapidly changing environment. Many business owners understand that they must embrace change to compete in their market. But do not fully understand the financial condition of their business. T
hey struggle and often fail because they lack the critical information necessary to make truly informed decisions. There are many financial reporting examples and financial reporting templates to choose from. This article explores financial reporting and the three main financial statements you can use to enhance your business decision making.
What is financial reporting?
Financial reporting in Australia is to record, analyse, and report your business income. The purpose of these accounts is to examine resource usage, cash flow, business performance, and the company’s financial health. Annual financial reporting helps you and your investors make informed decisions about managing the company and adhering to financial reporting requirements.
The three main financial statements we recommend you use to enhance your business decisions are:
- Balance Sheet (sometimes known as a ‘Statement of Position’)
- Profit and Loss Statement (sometimes known as an ‘Income Statement’ or ‘P&L’)
- Cash Flow Statement
All publicly traded firms are required to have these statements prepared. However, they are certainly not just useful for large organisations! Small businesses—including sole proprietors—should have these statements prepared regularly.
Think of these statements like a health check for your business, much like going to the doctor for a checkup. These statements allow you to see how financially healthy the various parts of your business are.
The balance sheet summarises the assets and liabilities and is an integral part of financial reporting. This is just a snapshot of the business in a moment in time. Most balance sheets frequently change because of the number of assets or liabilities a business has, and these summaries can be short or quite long, depending on the business.
One of the important figures to look for on your balance sheet is a figure known as Net Asset Position or Owner’s Equity, which tells you the net worth of the business that belongs to the owner/s.
It is calculated as:
Total Assets – Total Liabilities = Net Assets/Owner’s Equity
These are defined as the following:
- Asset – Something the business owns
- Liability – Something the business owes
- Net Assets/Owner’s Equity – the Net Worth of the business that belongs to the owner
Profit and Loss Statement
Another important statement for making key business decisions is the Profit and Loss statement. This statement summarises the business’s revenue compared to its expenses. The purpose of this is to demonstrate over some time. Whether the business made a profit or suffered a loss. There are a few key terms in a P&L, including:
- Gross profit – Sales minus cost of sales (when selling goods)
- Net profit – Gross profit minus operating expenses
- EBITA – Net profit before subtracting interest, depreciation, amortisation, and tax.
When making any key decisions. It is important to know whether the business is making a profit or a loss. Too often, businesses only look at their profit and loss statement once the time for making tactical decisions has passed by regularly preparing your profit and loss statement. You can better predict what changes you need to make to ensure you can achieve your financial goals over a given timeframe.
Cash Flow Statement
A Cash Flow Statement is similar to a P&L in that it is a report that covers a period, generally 12 months. In this statement, all-cash in-flows are measured against all-cash out-flows.
Benefits of understanding financial statements
These statements give savvy business owners a clear picture of the health of their business. If you, the business owner, compile, read, and reflects on these statements. You’re far better informed on how far your business has come and where it is headed.
Most businesses set goals for themselves. But it is often challenging to measure your progress toward these goals without empirical data. These financial reports provide that data and can open the door to additional forms of analysis, such as Ratio Analysis or the review of Key Performance Indicators (KPI). It is possible to go into information overload.
So a good rule is to start with the broad statements and then ‘drill down’ to specific areas that are in line with your short and long term goals.
Another key strategy is to use these financial reports to forecast future performance. This is often tricky to accomplish, especially if a business owner hasn’t developed the habit of preparing and reviewing the financial statements listed above. However, with practice, experience, and detailed knowledge of market conditions, it is possible to create a reasonably accurate forecast.
A great example of a forecast is something almost everyone is familiar with: a budget!
You must review your likely expenses for a while, balance them against your likely income, and decide how much (or little) you will spend in various categories by reviewing future events, seasonality, and the potential for problems. This very basic tool allows a business owner to create a benchmark that will help them determine if their business is growing or shrinking.
Some businesses require funding from external parties (like financiers, investors, or funds). Many of these businesses are in a growth phase where they have not yet been able to monetise their clients fully and need help to continue funding their growth. For businesses in this position, financial plans are a must!
Financial Plans are created using historical data and other known variables. After this has been compiled, business owners can make assumptions to create future projections over 12 months. Financial plans are best created with the help of an experienced accountant who understands the necessary details. It would help if you considered its impact on securing finance when required.
The mentioned financial statements are just a handful of the many types of financial reports available, as you can see. These various reports allow businesses to take a snapshot look at their operations from several angles, and this helps them manoeuvre around hidden risks.
Identify opportunities and support good management habits of reviewing figures monthly or quarterly. This information is critical to creating effective budgets, achieving business goals and securing required finance.
If you’re a Melbourne business that would like more advice on how you can use your financial reports to make better business decisions. Our team of passionate accountants bookkeepers at Ingrams Accounting are here to help with your financial reporting. We’re good with numbers, but more importantly, great with helping people just like you. Call us on (03) 9826 6000
This information is general and has been prepared without considering your objectives, personal or business circumstances, financial situation, or needs. Because of this, you should, before acting on this information, consider in consultation with your adviser its appropriateness, having regard to your objectives, personal or business circumstances, financial situation and needs.