By Anastasia Bennett, TwoBrain Mentor
Imagine you are driving a car and the dashboard stops working – what are you going to do? Stop and fix it, right? It’s pretty crazy how many business owners are driving their business without their dashboard working.
As a business owner, it’s your duty to understand your business’ financial position. You must use numbers to analyze what you need to work on, and what to develop to help your business thrive. You must get reporting and analysis reports on a monthly basis. If you don’t know where your business is going, you might end up somewhere entirely unplanned.
It’s surprisingly common that business owners don’t know how to translate reporting into real life. Good news! It’s not that hard and we are here to help you.
Accounting and financials do not have to be complicated and can be explained in simple language.
The most important reports that you need to track and understand are:
- Profit & Loss statement
- Balance sheet
- Cash flow
Profit & Loss
Your profit and loss statement is an accounting report that shows your income and expenses — and whether you made a profit or loss — over the financial year. It may also be known as an income statement.
There are lots of things that don’t show in the profit and loss report, things like:
- Debt repayment
- Loan repayment
- Lease on your car
- Tax payments
These things are covered by one of the following.
The balance sheet is a more detailed accounting report that shows what you own and what you owe at the time of the report. It’s the ‘snapshot’ of your business’ financial position.
Do you ever ask yourself where all money goes? Sometimes you look at your Profit and Loss and its showing that you made a profit but there is no cash in the bank!
Cashflow is money coming in, money going out and how much of it you have left in the bank at the end. Having a healthy cash flow means you are able to pay all bills when they are due.
Your Profit and Loss statement might be showing a profit even when there’s no money in the bank. That’s why we need to track cash flow as well.
A cash flow forecast is like a fuel gauge on your dashboard: it shows how much fuel you have and how far you can go before you have to get a refill. By the way, your savings account should have 2 months’ worth of expenses in it. If 2 months is a bit of stretch, try to start with 1 month and work your way up from there.
A cash flow statement should mean a lot to a business owner, because it shows how much money you had at the start of the month, how much you had at the end of that month, and what you did with the difference.
Here is how to track your cashflow every month. Get this information from your bank account:
- Starting balance
- Plus Income
- Less Expenses (including wages)
- Less personal drawings (wages to yourself through drawings and not payroll)
- Less Tax Payments
- Less Loan repayments
- End Balance
Financial statements can do more than report of the health of your business.
They can help you to see :
- what’s performing smoothly
- where you need to focus
- risks and opportunities
- potential nasty surprises
There are a few equations and ratios that are very helpful for making decisions within your business.
Knowing how to read financial reporting and being able to do bank reconciliations is beneficial if you need to reach out to the lenders or investors for your business or if you decide to buy a house or a building for your business. It’s also important for avoiding overtaxation. Ignorance costs you money. Overpaying taxes is the penalty for ignorance.
Numbers to track :
- Profit Margins
Your profit margin should be at least 10% after your wages are paid. Or, in the Profit First model, your profit margin should be 33% including your wages or drawings as the owner.
Expenses including staff wages and fixed costs $6,000
If you took $4,000 as drawings then your profit is zero
If your aim is to make 10% profit margin after your personal distributions then 10% of sales would be $1,000.
So , $4,000 less $1,000 = $3,000
Which means that you should only be taking home $3,000 for that month.
I can’t stress enough how important it is to understand your financial reporting. If you are not confident with your own abilities, hire someone who can do it for you and report to you monthly!
We recommend InciteTax, but if you choose to use someone local, that’s fine. Just get your dashboard fixed!