If you’re a business owner, you’ve likely been told to keep an eye on your financials. But what exactly does this mean? And why do you need to monitor them? In this blog post, we’ll explore some of the primary reasons for tracking and documenting your business’s finances.
These are actionable reports that keep you in the know.
- Profit & Loss Statement (Income Statement)
- Balance Sheet
- Cash Flow
Profit & Loss Statement
Profit & Loss Statements (P&L) provide a snapshot of your business’s financial performance over a period of time. They are one of the most important tools for analyzing how well you’re doing, and for identifying areas that need improvement.
A P&L report will highlight your revenue (from sales) compared to your expenses (costs). If there are any trends in your revenue or expenses. For example, if revenue has increased over time but expenses have not changed as much, this could indicate that something needs fixing or improving within the business.
Balance sheets are the most basic financial statements, showing what you own (your assets) and what you owe (your liabilities). The idea is to have more assets than liabilities.
Your balance sheet can be divided into many key parts, here are a few:
- Fixed Assets: These are things like buildings, equipment, patents and trademarks that help your business operate. They’re usually recorded at their original cost minus any accumulated depreciation.
- Current Assets: Cash on hand, accounts receivable (money owed to your company), inventory (things ready for sale) and other resources that can be easily converted into cash within one year’s time.
- Current Liabilities: Accounts payable (money owed by your company), accrued expenses such as payroll taxes or rent due soon after month-end closeout (a “monthly” liability) and unearned revenue from invoices received but not yet paid in full (“quarterly” liabilities).
Forecasting is useful for a number of reasons. For starters, it allows you to plan ahead in order to stay on top of your business’s finances and achieve your goals. You can avoid surprises—and the stress that comes with them—by managing your cash flow properly by forecasting revenue and expenses.
For example, if you are planning on hiring new employees or purchasing equipment for your company, this information should be considered when forecasting budgeted revenues and expenditures. In fact, we recommend projecting future expenses as well so that you know whether or not there will be enough money left over after paying all bills at the end of each month.
Depending on what kind of business owner you are (or want to be), it’s important that you understand how important accurate forecasts are for helping manage both short-term and long-term financial matters effectively!
If your business is worth its salt, it should be generating reports that are understandable and actionable. If you aren’t sure where to start, we recommend using Merritt Bookkeeping to help you get a handle on all your financial needs.