There are two basic financial statements relevant to small business:
- Profit and loss: reports on a business’s income, expenses, and profits over a period of time.
- Balance sheet: reports on the assets, liabilities and net equity of a business at a given point in time.
Understanding your figures is an essential skill for a successful small business owner.
It is important that you understand and can analyse the financial statements of your business so you can manage and control your finances and make more informed decisions armed with facts, not intuition. You should be getting a monthly Profit & Loss report as a minimum.
You should be able to understand and track the current financial health of your business without solely relying on your accountant. Some basic financial analysis could include making comparisons of your actual financial performance with forecast targets, performance in past years, and industry averages.
Bendigo Bookkeeping has a Qualified Accountant to provide explanations on your Financial Statements.
Apart from your record keeping legal records, good financial documentation forms the basis of creating financial statements. Establishing systems to maintain accurate, up to date financial records will ensure you have the information necessary to make sound business decisions.
The main accounting systems for small businesses are
Each of these now has online capabilities and Bendigo Bookkeeping can advise you of the most suitable package for your business.
Financial statements provide a summary of all the relevant financial information about a business. Financial analysis can then be performed on these statements to provide owners and managers more meaningful information on which to base decisions.
Once you understand the information provided in your financial statements, the next stage is to analyse your figures in order to gain a better understanding of your business.
Converting financial data to ratios or percentages
Comparing the absolute dollar values over time is not very meaningful and does not provide a complete view of your business. It does not correct for inflation or allow you to make comparisons with other businesses in your industry.
A ratio by itself means little unless it is benchmarked
A ratio needs to be compared to some expected or required outcome. For example, ratios might be compared to different time periods in the same business or to industry expectations to determine whether there has been a significant change.
The benefits of financial analysis
Financial analysis can tell you a lot about the performance of your business and will help you to determine the overall financial health of your business. Issues such as liquidity (does the business have enough cash to pay its debts on time) and profit (the percentage of net profit to total sales) are only part of the financial analysis..
Proper Financial analysis will help you identify problems, implement the necessary corrective actions, and improve your operations.
Contact Maurie on 0418573667 or email email@example.com at Bendigo Bookkeeping.