At the beginning of the New Year, it is crucial to have an overall understanding of your finances because it puts you in the position to make better decisions and set more meaningful objectives.
When you know your businesses’ numbers, it is easier to interpret your reports and ensure that you are implementing the right steps to achieve your set goals.
Essential reports for your business should include a Balance Sheet, Director Current Account, Profit & Loss Account, Statement of Changes in Equity and a Trading Account.
Additionally, these financial reports will help you identify any issues, like a decline in gross profit. This decline can have numerous root causes, such as ineffective pricing, poor purchasing, re-work and wastage. (This chain of events is termed Symptoms vs Root Causes.)
Knowing your numbers can even enable you to spot signs of an issue in advance. If you monitor your clients’ payment habits, you can respond accordingly if their pattern changes – if they start paying close to or past a deadline.
Reliable financial information can also display areas of strengths and weaknesses within your company. From here, your Balance Sheet can imply whether your businesses’ value is increasing or decreasing.
A balance sheet measures the ‘net worth’ of your business and can compare between different periods. It is useful for tracking the ‘strengths’ of your business, as a basis for calculating key ratios and can reveal if your company is solvent.
Director Current Account
With this, you will have access to a running record of funds introduced and taken from the business by directors. It can help monitor personal business expenditure, records different balances for each director and displays the businesses’ owed cost to each director (or if overdrawn, how much the shareholder owes the company).
Profit & Loss Account
These accounts are a fundamental driver of a businesses’ value. They track the overall performance of your business and provide a framework to benchmark results.
Statement of Changes in Equity
A Statement of Changes in Equity can show whether profits are paid out as dividends or retained. They can obtain the value of the business and also reveal if your company is solvent.
This account tracks sales, gross profit, variable costs and implies whether your margins are improving. You could even use several to pursue results for different divisions or product lines.
The more you know about your business, the better it will be, and little adjustments can have a notable impact on the overall results.