26th February, 2019
The new financial year is a great checkpoint to review your business health and ask some simple, but important questions. Are you winning? Are you making money? Should you carry on, change tack or close up shop?
First things first. If you don’t have any accounting software in place, now is the perfect time to start using some. You will be able to start building the picture of your financial position from Day One.
Many small business owners don’t have the time, or inclination, to spend on understanding the ins and outs of how accounting works. And that’s OK. Good accounting software can take care of the tricky stuff for you. But it’s critically important you’re familiar with these three key financial statements:
Cash flow tracks your income and expenses and shows the movement of your money over a period of time.
You hear it all the time: cash is king! This is the single biggest reason business fail. They just don’t have enough cash coming in to the business to cover their outgoings and keep the lights on.
Cash flow reporting helps monitor how your cash position has changed over time, tells you how much profit your earnt and where your cash was spent. It can help you plan for periods of cash flow peaks and troughs, and drill down to see what customers are slower to pay or creditors have shorter terms of trade.
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How much profit are you actually making? Your Profit and Loss should show you exactly how far out in front you are (or behind, for that matter).
See what’s contributing the most to your bottom line and the areas of your business that could be performing better.
Your balance sheet is a snapshot view of your asset, liability and equity account balances for any given date.
Your balance sheet will tell you how much your business is worth, taking into account how much you own and owe
Understand the company’s financial position and what it’s worth in real terms.
Learn how to generate a balance sheet in MYOB Essentials.
The cartoon below is a great illustration of the accounting concept in practice.
The river is a businesses transaction stream and at the top there’s a whole lot of transactions flowing.
From a cash flow perspective, the more water in your waterfall, the better.
From a Profit and Loss perspective, the revenue flow is the revenue from sales and Profit and Loss pond is where your money comes in and all your expenses go out from. Whatever is left has tax deducted and that is your net profit.
From a balance sheet perspective, your profit creek (or hopefully profit river!) feeds into your balance sheet and this is where you take drawings from.
In a nutshell, you want to generate as much revenue as possible and minimise your expenses to have as much profit as possible, while also hopefully minimising the amount of extra capital you need to introduce in order to grow.
Understanding these concepts will allow you to become a business owner as they will give you the clearest, quickest insights into your business health.