- Profit and Loss.
- Balance Sheets.
- Cash Flow Forecasts.
Do these 3 statements get you excited or make you want to run for the hills?
We hope it’s the former.
But, if it is the latter, we’re here to help ease the stress and turn that hate into a love relationship with your financial statements.
Getting to know your financial statements
We understand that financials can be intimidating. Yet, information is power.
Your financial statements are vital to helping you to:
- Meet regulatory requirements;
- Understand and manage the overall success of your business;
- Plan for future growth.
When looking into your statements, start small. Start with bite-size chunks of the last month or two and then work your way up to a full year in review.
To get started, these are the first big 3 to wrap your head around.
The Big 3
-
Profit and Loss
What is it: A profit and loss statement shows the profitability of your business over a specific period and can be produced monthly, quarterly or annually.
Used for: Monitoring your business activity. -
Balance Sheet
What is it: A summary of your business assets (what your business owns) and liabilities (what your business owes).
Used for: Knowing your business equity – how much money you would have if you sold all your assets and paid off all your debts. -
Cash flow statements
What is it: Shows how much cash is moving in and out of your business over a period of time.
Used for: Knowing the liquidity of your business – how quickly you can get your hands on cash in your business.
Some additional tips
Know your expenses
Reconciling your accounts on a daily basis is the first step to paving the way for good financial management.
If there are discrepancies, they are much easier to manage when your memory of your spending is fresh, as opposed to trying to reconcile a spend from 6 months ago.
Always ensure to analyse your expenditure as a percentage of operating costs. It’s an easy way to interpret and compare your costs month-on-month. If there are discrepancies, they will be glaringly obvious. Once you get to know these figures, any future changes will be easier to identify and to action.
Manage your cash flow
Cash flow management is the pinnacle of effective financial management.
Businesses may generate large amounts of income, yet if cash flow is poorly managed, things can turn south very quickly.
By keeping an eye on your monthly figures, you will begin to see a trend of which months are your busiest and highest income-generating, versus the quieter months when sales and income may be lower.
This is where managing the ups and downs with good cash flow management comes in.
Understanding your financials helps you to recognise your cash flow patterns and implement strategies to optimise your cash flow – such as promotions to increase sales, delaying large purchases at certain times of the year and adjusting purchases from suppliers and effective staff management.
Manage your debt
If you have a loan for your business, be sure to see that the loan is decreasing at the end of every month, and you are effectively managing your debt.
Be adaptable
The last five years have been tough on business owners with the effects of COVID and disruptive financial markets still wreaking havoc on the economy. If it has taught business owners anything, it has been that being able to adapt is vital to staying afloat.
Business can indeed throw curveballs and as a business owner, the way you react and adapt can make all the difference.
Staff go on leave.
Competitors come and go.
New technologies are introduced on a near-weekly basis.
Keeping your business on the front foot is so important to ensure you remain relevant and competitive.
Our Final Thoughts
By getting to know your financial statements, you are setting your business up for its best chance at longevity and success. Knowing how to manage your cash flow, manage debt, prioritise your spending and make smart financial decisions are valuable tools to have as a business owner.
If someone else manages your books, get to know them! Don’t be afraid to get in and get your hands dirty. All successful business owners have a handle on their own books.
If you manage them in-house, reconcile on a weekly basis so any issues are picked up on immediately and not 3 to 6 months down the track. It can make all the difference.
If you need assistance with understanding your business financial statements, or if your veterinary clinic could do with a financial health check, get in touch with our team.
