6 Reasons To Look at Your Financial Reports
Making time to look over your financial reports each month is an important task for any business owner. If you are not taking the time to do this, either because you’re too busy, or perhaps you don’t really understand what you’re looking at and it doesn’t make sense to you, then here are 6 reasons we recommend that you should start to.
But before we get our 6 reasons, let’s talk very quickly about which reports to look at. At a bare minimum, and depending on the complexity of your business, you should be looking at the following:
- The Statement of Financial Performance – also known as the Profit and Loss report (P&L) or the Income Statement – tells you, as the name suggests, how your business is performing over a period of time, such as a month or a financial year. In broad terms it shows the revenue that your business has generated, less the expenses for that same period. In other words, it shows how profitable your business is.
- The Statement of Financial Position
– also known as the Balance Sheet shows the value of the business’s Assets, Liabilities and Equity.
- Assets include things like money in bank accounts, Plant and Equipment, Accounts Receivable balances
- Liabilities include things like Bank loans and credit cards, Accounts Payable, and Hire Purchase balances
- Equity is the difference between your Assets and your Liabilities and includes Retained Earnings and Owner Funds Introduced - Accounts Receivable Ageing report (Aged Receivables) – this shows how much money is still owed to the business as at a certain date in time, and is usually segmented as to how overdue they are, or sometimes by how far past the invoice date they are. Generally, you will have Current, 30, 60 and 90 days columns.
- Accounts Payable Ageing Report (Aged Payables) – this report shows who the business owes money to as at a certain date in time and, like the Accounts Receivable Ageing report, is usually segmented by overdue period.
So why bother?
- Understand your business better
- by looking at your Profit and Loss report monthly you will get a good picture of how your business is performing month by month and it will give you a better understanding of what makes up your profit. It can be helpful to compare periods, or to look at a month by month P&L, so you can clearly see on one page the revenue and expenses month by month. This will help to identify trends in your data and many also help to highlight anomalies in coding/categorising.
- Accurate information for lending purposes
– If you are applying for a loan or an overdraft, the bank or financial institution will look closely at both your Profit and Loss report and the Balance Sheet as a lot can be learned about a business by looking at these reports together. If you are unsure what some of your balances are in your accounts, get in touch and we can explain them further.
- Get paid quicker and reduce bad debts
– by looking at your Accounts Receivable Aged Summary each month you can follow up with overdue accounts promptly which often results in getting paid quicker. The longer an overdue amount is left unpaid the higher the risk of it not being paid at all, so it is important to keep on top of this.
- Better relationships with your suppliers
– Assuming you are entering your supplier bills into your accounting software (recommended for most businesses to get an accurate profitability figure) your Aged Payables report will alert you to any unpaid or overdue amounts. Supplier relationships are an important aspect of your business and paying on time is crucial to maintaining those relationships.
- Better cashflow
– having an accurate understanding of how much money the business is owed, and how much money the business owes, can help with cashflow planning to ensure that there is enough money when needed. Additionally, understanding the trends of your business, its profitability drivers, its expenses, etc., can help to plan sales and marketing campaigns so that the revenue keeps coming in.
- Better business decision making – Your financial reports tell the story of your business and it’s important that you understand the story that they are telling you. The better you understand what’s going on in your business the stronger position you will be in to make better business decisions that affect the profitability of your business and its financial viability.
If you would like to know which reports are relevant to your business, and you want to better understand what’s going on in your business , then get in touch so we can make a time to go through them with you.
Your business success is important to us and we are here to help you, request a proposal today.
Managing the gap between the receiving money into your business and paying money out of your business is vital for sustaining viability. Debtor days is the average number of days taken for a business to receive payment for goods or services. Keeping track of the average number of days for a business to receive payment is important in understanding the cashflow gap you might experience and the impact on cashflow planning and budgets. How to Calculate Debtor Days (Year-end receivables amount ÷ annual sales) x 365 days = average debtor days. Here's an example: An IT consultant has in her terms and conditions that payment is due 21 days after invoice date. But she is interested to know what the actual average payment time is. Trade debtors at 30 June 2019 = $35,000 Annual sales for 2019 = $478,000 (35,000 ÷ 478,000) x 365 = 26.7 days With this information, she can either alter her cashflow planning according to the actual time-frame or take steps to reduce the average number of debtor days. What can you do to reduce the payment times? Update your payment terms - and make sure the terms are clear on every invoice issued. Don’t forget to include bank details on the invoice! Regular admin - schedule a regular time for your own administration and get your invoices out promptly. Send to the right person - when you send invoices, make sure you address the email personally to your contact. Send the invoice to multiple addresses if possible, for example, your contact and the accounts department. Use technology to your advantage - use automated invoice reminders to notify customers when an invoice is about to be due and then when it is overdue. Do not wait to send notifications manually, let the software do it as soon as the invoice is a day overdue. Make it easy for your customers – list the payment terms, for example, due in 14 days, as well as the actual due date. Provide incentives for early payment - for example, a 5% discount if paid within five days. Offer several payment methods for clients - make it easy to pay by adding an online option such as credit card or PayPal. Offer instalment payment plans - over a mutually agreed period. This allows you to plan for part payments, rather than being inconvenienced by the whole invoice being paid late. Do not offer unlimited credit to customers - make sure your terms and conditions include the right to refuse further supply if invoices are outstanding. Request part or full payment before supplying more goods or services. Talk to your suppliers - Maintain good relationships and clear communications so they are more likely to help you if you need an extension on your bills. If possible, renegotiate supplier terms that suit your business cashflow. During tough times it can be difficult to get paid on time. Use low activity phases in your business to update your terms and conditions, implement alternative payment options, think about ways of making it easy for customers to pay you and clarify information on your website. Talk to us about adding payment options, updating your software and improving business systems to assist in reducing the number of debtor days to improve your cashflow. We can also look at average debtor days of your business compared to industry averages and discuss ways of managing cashflow during difficult periods.
Recent court cases involving casual workers have increased attention on casual worker classification, which means your workers may be more aware of the ability to convert to a permanent position. The law has not changed; however, these cases are good reminders for employers to be aware of the rules around converting casual employees to permanent positions. What Makes an Employee Casual? No expectation or commitment about duration of employment. No guaranteed hours of work. Usually works irregular hours. Is not entitled to paid leave. Can usually end employment without notice. Note that there is such a thing as a long-term casual employee. Long-term casuals may be eligible for flexible working arrangements, parental leave and long service leave, even though they don’t have guaranteed hours of work or expectation of ongoing work. When Does a Casual Employee Become Permanent? This is addressed in most modern awards in a casual conversion clause. Employers should check the relevant award provisions to see if there is an obligation to offer a part-time or full-time position, then follow the directions about offering permanent positions. Example of Casual Conversion Rules Each award must be checked for details, however there are similar guiding principles. Casual employees are entitled to ask to change to full-time or part-time employment when they have worked a regular pattern of hours over a set period (usually 6 to 12 months) and could reasonably expect to continue to work those hours as a full-time or part-time employee without significant changes. Employers must specifically notify casual employees about this entitlement within 12 months of the casual start date. Casual employees that do not receive notification of this entitlement are still entitled to request a change to full-time or part-time employment. An employer can only refuse the request if there are ‘reasonable grounds’ such as the employee not working regular hours or there are other significant changes to the current work patterns. There are more provisions and details in each award’s casual conversion clause – employers need to check the applicable award to make sure they comply with the casual conversion requirements. Visit the Fair Work Ombudsman Casual Employees webpage for more detail. Talk to us if we can help with payroll management and assessing the classification of your workers.
Cash is oxygen for your business and measuring working capital is your regular health check to keep your business alive; especially in turbulent times. #WeCanHelp identify strategies to increase #WorkingCapital
