Entrepreneurs are a busy breed. Being always on-the-go and ready for the next project, client, innovation and so on.. What this will mean is that they will take less time to review their financials.
However, this lack of understanding may actually work against the busy-preneur as they will continue working ‘in-the-business’ and soon realize down the line that they have not made any money in the past 3 months! This situation of course, can be avoided. By reviewing your financials often, you can constantly reassess your journey and make necessary adjustments to it.
The following are the three most useful reports, that can give the entrepreneur a quick snapshot of the overall performance of the business:
1. Cash Flow Forecast
The almighty cash flow forecast. This is a ‘forward-looking’ report that aims to alert the user of any ‘gaps’ that may occur at a certain point in the future. Keeping up to date with cash flow is therefore important to asses the company’s liquidity, flexibility and financial performance.
Due to its ‘forward-looking’ nature, a cash flow forecast can signal key occurrences such as cash being tied up in accounts receivables. If we know that there is a lump sum to be paid out in the next month for instance, this can signal to the finance team to redirect their resources to chase debtors in order to make that lump sum payment or plan for an alternative source of funding to meet the potential cash shortfall. Making sure there is enough money to settle short term liabilities is important in preventing future financial challenges.
Other than settling debts, cash flow knowledge is also important in expanding the business. Take for instance if you want to invest in new equipment. When will cash flow allow you to do this based on your current financial situation? This too, can be answered by the cash flow forecast.
2. Profit and Loss Report
The profit and loss report is a performance-based report that is ‘backward-looking’. What this reports aims to achieve is to inform its users on how the business is tracking financially, while performing its operations at a certain point in time.
This report is useful to assist entrepreneurs to review their performance against previous periods, measure their revenue growth, and track their ongoing operational costs. This report is particularly useful as it is able to further break down a business into its respective revenue, variable and fixed costs category for a particular service line. Depending on which accounting software you use, you may also be able to track the performance of each business unit by store.
In summary, this report is useful to assess the ongoing operational profitability of the business.
3. Balance Sheet Report
The balance sheet report is a summary report that enables its users to determine what the business OWNS vs what the business OWES at a particular point in time.
Have you recently purchased an asset on a loan? There should be a Non-Current Asset (for the asset) and a corresponding Non-Current Liability (for the loan) in your balance sheet. Perhaps you have not paid out your superannuation yet? This can be seen in the Current Liabilities section of your balance sheet.
This report provides the entrepreneur a summary of the business’ net assets, and to identify how the business’ resources (i.e. cash, assets, etc) are being utilized. Generating a balance sheet report across different periods will allow the entrepreneur to see and identify if debt is increasing at too fast a rate. This is common especially in high growth, capital/labour-intensive companies.
Understanding these 3 reports is key to assisting entrepreneurs get more involved with their numbers and in return, take a more active approach. By constantly reassessing your numbers, you will be able to make necessary adjustments towards your journey of financial freedom.
Check out our Budgeting Basics post which goes into more detail on how you can get started on planning and devising your business for success.