Having sufficient and up to date accounting records provides vital information for businesses to be able to prepare reports that can determine how they are performing. These financial reports provide summaries of transactions which give an accurate representation of the past, current and future forecast of the business. Therefore, financial reporting should be carried out on a frequent basis.
The 3 most important financial statements used by any business include:
- Balance Sheet
- Profit & Loss Statements
- Cash Flow Statement
Usually these are formally prepared at the end of every financial year by an accountant.
A balance sheet is a statement of the assets, liabilities, and capital of a business at a particular point in time.
Owner’s Equity = Assets – Liabilities
- An asset is classified as something that the business “owns”
- A liability is classified as something that the business “owes”
- Owner’s equity is the net worth of the business to its owners
PROFIT AND LOSS STATEMENT
A profit and loss (or income) statement lists a business’ sales and expenses. It shows how much profit is being made, or how much you’re losing. A profit and loss can be completed every month, quarter, or year.
Gross Profit = Sales – Cost of Sales.
Net profit = Gross Profit – Operating Expenses.
CASH FLOW STATEMENT
Fundamentally, the cash flow statement is concerned with the flow of cash in and out of the business where the net cash balance at the end of a period is represented by the cash balance at the beginning of the period plus cash-in less and cash-out. A cash flow statement is an important indicator of a company’s financial health, because a company can report a profit on its income statement, but at the same time have insufficient cash to operate.
The focus of management reporting can be expressed broadly as reports that businesses use to monitor the actual performance of their business against its set goals and objectives. Management reports help to keep track of the smaller details.
The goal of management reporting
- Determine benchmarks.
- Measure and monitor specific performance metrics and KPIs.
- Ensure better communication between stakeholders, colleagues, and executives.
- Guide your next steps.
- Monitor performance frequently.
By concentrating on management reporting, businesses can focus on areas where the performance of the business is not up to standard with its expectations and industry norms (i.e., the results and achievements of other similar businesses).
It is essential to plan and tightly manage financial performance. Creating a budgeting process is the most effective way to keep a business and its finances on track. Comparisons of actual results to budgets assist businesses to ascertain whether corrective action may be required. Variations, particularly when analysed during a trading period, can indicate where forecasted results may vary from expected results.
Businesses that are pursuing funding from outside parties such as banks or shareholders will typically require a Financial Plan to be put together. This plan usually provides details such as a projection of the business’ financial position, resulting from the accumulation of its business activities.
Financial Plans are usually based on past data and other known variables, to provide future projections, which would normally include an estimate of the business’ cashflow requirements.
Depending on who is reviewing the financial plan, it needs to be formal and include capital requirements, expected revenue vs costs for a projected profit and loss statement, balance sheet and cashflow statement.