A beginner’s guide to understanding business financial statements

Business financial statement can feel like they’re written in a foreign language sometimes. But understanding your business numbers doesn’t have to be overwhelming or complicated. Think of your financial reports as your business’s story told through numbers, and everyone loves a story, right?

The three key characters in your financial story

Every business has three main financial reports that tell different parts of your story: the profit and loss statement (P&L), the balance sheet, and the cash flow statement. Don’t worry if these terms sound scary – we’re going to break them down into bite-sized pieces that make sense.

The Profit and Loss statement

Think of your P&L as your business’s diary. It shows all the money coming in (income) and going out (expenses) over a specific period. It’s like keeping track of your personal current account, but for your business.

Here’s what it tells you in plain English:
– How much money you’re making from selling your products or services
– What you’re spending to run your business (like rent, salaries, and supplies)
– Whether you’re making a profit (yay!) or experiencing a loss (time for some changes)

The Balance Sheet

If the P&L is your diary, the balance sheet is like a snapshot of your business’s financial health at a specific moment. It shows three important things:
– What your business owns (assets)
– What your business owes (liabilities)
– What’s left over that belongs to you (equity)

The Cash Flow Statement

This is probably the most important business financial statement you’ll ever read, because cash flow problems are the number one reason why businesses struggle and ultimately fail. Your cash flow statement shows how money moves in and out of your business, like a detailed travel log of your funds.

You might be wondering, ‘If I have a P&L, why do I need this too?’ Well, just because you’ve made a sale doesn’t mean you’ve received the money yet. Similarly, you might have expenses you haven’t paid for yet. The cash flow statement shows you the real timing of when money comes in and goes out.

Red flags to watch out for

Just like you’d notice if your personal bank balance was getting too low, there are warning signs in your financial reports that need your attention:
1. Your profits are good but you’re always short of cash
This usually means you’re having issues with collecting payment from customers or your timing of paying bills needs adjustment. It’s time to look at your payment terms and collection processes.
2. Your expenses are growing faster than your sales
This is like noticing your business shopping habits are getting out of control – it’s time to review where you’re spending money and whether it’s all necessary. It’s amazing how many subscriptions we sign up for that we then barely use – what can you cut?
3. Your gross profit margin is shrinking
If you’re making less profit on each sale than you used to, you might need to review your pricing or look for ways to reduce costs. Speak to your suppliers to see if you can get better rates if you bulk buy.

Other helpful business financial statement and reports

While the P&L, balance sheet, and cash flow statement are your main storytellers, there are some other really useful business financial statements and reports that can give you even more insight into your business’s health:

The aged debtors report

This report shows you who owes you money and for how long. Think of it as your ‘getting paid’ to-do list. It helps you stay on top of overdue payments and manage your cash flow better. After all, a sale isn’t truly complete until the money’s in your bank!

The aged creditors report

This is the flip side of the aged debtors report – it shows you who you need to pay and when. It’s like your business’s bill calendar, helping you plan your payments and maintain good relationships with your suppliers.

The Budget vs Actual report

Ever wonder if you’re sticking to your business plans? This financial report compares what you thought would happen with what actually happened. It’s like comparing your shopping list to your actual receipt – it helps you spot where you might be overspending or where you’ve done better than expected.

Key Performance Indicators (KPIs)

Think of KPIs as your business’s vital signs. They show important measurements like:
– How much profit you’re making on each sale
– How much it costs to get new customers
– How much your average customer spends
– How good you are at retaining customers and getting repeat customers

Break-even analysis

This report tells you exactly how much you need to sell to cover all your costs. It’s like knowing how many hours you need to work to pay your personal bills. This information is super helpful for making pricing decisions and planning new products or services.

Making your numbers work for you

Now you understand what all these reports are telling you, here’s how to use them:
1. Set aside regular time to review your numbers
Just like you’d check your personal bank account regularly, look at your business numbers at least monthly. Put it in your calendar and treat it as important as any other business meeting.
2. Look for trends
Are your sales growing? Are certain expenses creeping up? Understanding these patterns helps you make better business decisions.
3. Use them to plan ahead
Your financial reports are like a crystal ball for your business – they can help you spot potential problems before they happen and identify opportunities for growth.

Support to understand your business financial statements

Remember, you don’t have to figure this out alone. Just like you’d ask for directions in a new city, it’s perfectly fine to ask for help understanding your numbers. That’s exactly what we’re here for at Adams Accountancy – we love making the complex simple and helping business owners understand their numbers without the confusing jargon.

Most importantly, remember that every successful business owner started exactly where you are. Understanding your business financial statements and reports is a skill that develops over time, and there’s no such thing as a silly question when it comes to understanding your business better.

Need help making sense of your numbers? We’d love to have a chat about how we can help you understand your business’s financial story better. Contact us online or call 01322 250 001 for a free, no-obligation conversation about your business’s financial reports.