The Power of Financial Reports

Written by Elements Advisory Group
September 18, 2023
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business, business development, business growth, business management, business strategy, small business

Staying on top of every aspect of the business can be overwhelming. But it is also necessary for business owners to elevate their business when opportunities arise.

Financial statements are snapshots that display business activities and the business’s financial performance at a point in time. They provide a holistic view of a business’s health.

Externally, financial statements are often audited by government agencies, investors or banks to ensure accuracy for tax, financing, or investing purposes.

A business owner can use financial reports to find information quickly and get an overview of the business trajectory to assist in day-to-day operations.

Do you have the cash flow to accept that next project? What assets could you liquidate quickly to cover a shortfall? How much non-operating income have you actually made by renting out that property?

These financial reports can provide significant insight into what is and what is not working for your business.

Outsourcing your accounting function may be the best alternative if you don’t have the time to take on anything else. Outsourced bookkeeping services will produce the four most common financial reports and give you the information you need.

Financial reports can provide insight into what is and is not working for your business.

The 4 Most Common Financial Reports.

1. Balance Sheet

A balance sheet is a financial statement that provides a snapshot of a company’s financial position and shows what the company owns, owes, and has invested in the business. This can also show the current value of a business for the period it covers.

The balance sheet outlines the following items:

  • Liquid assets – cash, certificates of deposit, short-term securities and treasury bills.
  • Current assets – accounts receivable, inventory, fixed assets and prepaid expenses.
  • Current liabilities – short-term and long-term debt, accounts payable, payable wages and dividends, tax expenses and client prepayments.
  • Shareholder and owner equity values – retained income, receivable dividends, capital gains and stocks.

The balance sheet is essential because it shows whether a company has enough assets to cover its liabilities. This is a key indicator of financial stability.

Understanding the balance sheet enables a small business owner to gauge financial performance, monitor financial stability, identify risks, and make informed decisions about investments and expansion.

2. Income Statement

An income statement, also known as a profit and loss (P & L) statement, is the most important financial report because it shows whether a company is making a profit or a loss. It provides insights into how much revenue is generated, the cost of goods sold, and the expenses incurred to run the business.

This document has several key elements:

  • Operating revenue which accounts for selling products or services.
  • Net and gross revenues, including total sales revenue and remaining revenue after subtracting costs.
  • Nonoperating revenue from accrued interest, investment returns, royalty payments, and capital gains.
  • Direct expenses, including the cost of goods sold (COGS), depreciation and selling, and general and administrative costs (SG&A).
  • Secondary expenses, like debt or loan interest, asset loss and capital loss.

Calculating your profit margins is another helpful thing you can do with an income statement. Profit margins tell you how good your business is at turning revenue into profits. It’s helpful to see if you’re making the most of your earnings.

3. Cash Flow Statement (CFS)

A cash flow statement shows a company’s cash inflows and outflows over a specific period. The CFS is important because it shows how much cash a company has to pay its bills and invest in the business.

A positive cash flow indicates that a company generates more cash than it spends. In contrast, a negative cash flow indicates that a company spends more than it generates.

The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight into whether a company is financially stable. A business could display a profit in the Income Statement but have a negative cash flow.

The Cash Flow Statement is important because a business could display a profit but not be able to pay bills.

The cash flow statement typically comprises three key elements:

Operational activities – accounts receivable and payable, inventories, wages, income tax and cash receipts.

Investment activities – the generation and use of investment earnings, asset sales, issued loans or credit and payments from acquisitions or mergers.

Financing activities – stock repurchases, payable dividends, debt repayments and issuance, cash from investors and cash payments to shareholders.

4. Statement of Changes in Equity

A statement of changes in equity shows a company’s changes in equity over a specific period. This report shows how much money has been invested in the business and how profit has been retained. Retained earnings are often used to pay off the company’s debt obligations. It also shows dividends paid to shareholders and changes in share capital.

Notes to the Financial Statements

Notes to the financial statements provide additional information about a company’s financial position and performance. The notes explain the accounting policies used to prepare the financial statements, give details on significant transactions, and disclose any contingencies or risks. The notes are important because they provide additional context and transparency to the financial statements.

Why Are Financial Reports Important?

Financial reports help business owners make informed decisions about allocating resources and planning for the future. They can be produced monthly, quarterly or annually, depending on a business’s needs. Here are some reasons why you should be monitoring your financial reports regularly:

👉 Measure performance
Financial reports provide a benchmark for measuring a company’s performance over time. By comparing financial statements from different periods, business owners can identify trends and areas of improvement.

👉 Facilitate decision making
Financial reports provide insights into a company’s financial health, which can inform business decisions. For example, if a company generates a lot of revenue but has high expenses, the business owner may reduce expenses to improve profitability.

👉 Evaluate financial stability
Financial reports show a company’s financial stability by providing information about assets, liabilities, and equity.

👉 Comply with regulations
Annual Reports are a requirement that businesses must ensure to meet their regulatory obligations.

Utilising Financial Reports Effectively

Financial reports are an essential tool for financial management in Australian businesses. They provide a snapshot of a company’s financial health and inform decision-making.

Accounting software extensions can automate the production of financial reports by combining all your accounting information. However, the value of decoding the number can greatly impact what a business does with the information.

By outsourcing your bookkeeping function, you can save time and potentially make more money than the investment of outsourcing. Having an expert interpretation of the numbers will impact strategic moves for business growth and development.

Financial reports outline the overview of your business’s financial position. You can optimise your strengths and strengthen your weak points to build a well-rounded and resilient business.
Reach out to find out how we can help you elevate your business.

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