It has never been easier to take time out to learn how to understand exactly what your financial reports tell you. With software such as Xero, it has become easier for you to have your financial information at your fingertips. Maybe you are already using Xero, have been for years or maybe you are contemplating the move. Which ever position you find yourself in, if interpreting financial reports has never been your forte, perhaps it is time to make this a focus. Cloud software like Xero means you have access to your key business information, anywhere and everywhere but what good is that if you don’t understand what they mean.
A great finance system will have a suite of reports that can give you the low down on what is happening in your business. Below are a few key reports and how you can use them.
Profit and Loss or Statement of Financial Performance
This report tells you for a certain period of time, exactly how your business has performed – whether it has made a profit or a loss for that timeframe. This report is valuable as it shows you what your key margins are and allows you to assess whether or not your business is delivering the results you expect. A Profit and Loss forecast is a powerful tool for planning.
Balance Sheet or Statement of Financial Position
This reports details the assets, liabilities and the owner’s business. This report is a great health check of your business. For instance it will show you whether or not you have enough cash to cover the obligations you have outstanding at the present time. Or it can easily show you that the money you have earned is sitting in your Debtors accounts, waiting for your customers to pay you.
Accounts Receivables or Debtors
‘Aged Receivables’ is a list of customers who owe you money and it tells you exactly how long they have owed you that money for – hence the “age”. Allowing your customers to delay their payment to you means that that cash resource you have earned is being used for someone else’s benefit rather than yours. Debtors days is a measure of how long debtors take to pay you. Your aim should be to keep this as low as possible.
Accounts Payable or Creditors
‘Aged Payables’ is a list of suppliers who you owe money to and it tells you exactly how long you have owed them money. If a supplier gives you time to pay their invoice, take it – don’t pay it early, unless there is an incentive (a discount in price) to do so. This is your chance to use your available cash for a little bit longer before you have to pay your supplier. Take advantage of that resource for as long as you have it.
Cashflow or Statement of Cashflow
This report gives you an accurate picture of the flow of cash into your business along with the flow of cash out of your business. It gives you a net cash position for the timeframe you have run the report for. This report should be reviewed in conjunction with your Profit and Loss, and Balance Sheet as they each serve different purposes. Primarily though, this report will tell you exactly where your cash is, or where it has gone. Ideally it would be distributed between reporting on cash for operating purposes, versus investing or financing purposes, which should give you a clear snapshot of your cash.
Understanding these five key reports is an essential part of being a successful business owner who runs a healthy business. Remember though, reports are only as robust as the data in them. So if you are not sure about the data in your reports ( ie/ whether your data has been coded correctly) ask someone to review your data before you run your reports.