Did you know that the main cause of business failure is poor financial management? Good financial management is how businesses make money. The odds of surviving in business long term are very slim if you fail to get it right.
A very common scenario is that many people go into business with no real financial plan or system in place to keep track of their finances. Before they know it they have run out of money. Have you ever heard of the saying “failing to plan is planning to fail”? The way it applies to business is if you don’t have a solid financial plan, you are setting yourself up to fail. It is like getting into a car and driving to your destination without a roadmap or driving a car with a faulty fuel gauge. Business owners need to get a grip on their numbers and stop flying blind.
Fortunately there are reports in your accounting system that can provide you with the information you need to know to manage your business. You can either access these yourself or get your accountant or bookkeeper to provide them to you. However, just getting the reports is not enough. You need to actually understand what they are saying as there is a story behind the numbers that reveals the true state of your business. If it is all too overwhelming then you will need to get your accountant or bookkeeper to explain them to you.
The main reports you need to understand your numbers are:
Profit and Loss Statement – tells you how much profit you are making in your business by detailing your income and expenses.
Balance Sheet – tells you what you own (assets) and what you owe to external parties (liabilities) and to the owner (equity). It is a snapshot of the true state of a business at a given point in time. This is the most important report you would need to look at.
Aged Debtors and Aged Creditors Reports – tells you how much your customers owe you and how much you owe your suppliers.
Budget – is an estimate of what your income and expenses will be for a future given period.
Cash Flow Forecast – is an estimate of the inflows and outflows of cash for a future given period.
Next month we will continue our series of blog posts on understanding your numbers, where we will explore the profit and loss statement to uncover what information it provides to business owners and how to interpret it.
Do you take the time to understand your numbers? What reports do you look at?
Would love to hear your thoughts!
Straight Forward Accounting is a specialist Xero bookkeeper. We support small businesses to improve their financial administration and get real clarity around their numbers. Book a free consultation to find out more today.