The production of financial reports enables a small business owner to maintain control of finances and remain aware of any potential problems that could impact on the company. Reports can become confusing though, and this is why many companies incorporate financial outsourcing services. Production of the most important financial reports and knowing how to interpret them is crucial for the welfare of a business.
Why do you need financial reports?
Managing a company’s finances can be challenging, especially when resources are limited. To build a profitable concern, a company must be generating sufficient income to create a healthy cash flow and maintain financial stability. Reports make it easier to stay in control of the company finances and spot potential problems.
The balance sheet
The balance sheet provides details of the company’s assets and any liabilities you have. Although the balance sheet gives an overview of the net worth of the business, this shouldn’t be confused with its market value. However, the report isn’t connected to the daily operation of a business, but should still be produced on a regular basis to ensure that the company remains profitable.
The profit and loss statement
This report is also known as the income statement and summarizes the total income and expenditure to indicate whether the company is running at a loss or making a profit. The income statement is crucial for a company and may be required by a lender if you are applying for a business loan. A lender may be hesitant about lending to a company if the income statement shows that the business is running at a loss. However, an income statement that indicates a profit will have a positive influence on lenders, investors, management, and other stakeholders.
Cash flow
The cash flow statement is arguably the most important report produced by a business. A cash flow report will indicate whether income or expenses have increased during a specific period, the amount of cash received and how it was utilised. The information from the balance sheet and the income statement is included in the cash flow report and is much easier to decipher in this format. A forecast of cash flow may highlight areas that require immediate attention and will be used when forming any decisions, especially when considering purchases. Cash flow reports should be produced frequently so that you can stay ahead of finances and be able to make a knowledgeable decision based on real time information.
The unavoidable truth is that the production and correct interpretation of finance reports is complex, and that the wrong interpretation can lead to financial problems. If you would like to have an informal chat, why not get in touch with us?