Why Financial Reports Matter 

We talk a lot about financial reports here at Northwest Accountancy, but what can you actually do with them? We’re always happy to help our clients understand these reports, but they only paint a part of the picture.  

These reports are not just for tax time. They’re a temperature gauge, a snapshot of your business at a moment in time. They’re to be used for forecasting, problem solving, and problem analysis. They can help you prepare for large expenses and save money. These are essential for business planning, decision making and management.  

How do I use a Profit and Loss Statement? (P&L)  

When you know how to read your P&L statement, you can use that information to find out how your business is currently operating.   

Use it to find out how much profit you are actually making per sale. With this information, you can consider what products are your best earners, and is there any way to leverage that? You can increase your average profit per sale by deleting or removing products that have low profit margins or look to increase prices or reduce costs. Your business, if you’re using our Profit First ideology, should be showing a clear profit at all times, ensuring you and your invoices get paid.   

Percentages play a big part of reviewing your reports and comparing them to previous years.  If you have had a huge year of growth, then your numbers will look bigger, however when you compare that as a percentage to last year, are you still making the same amount of profit? 

Under the Operational Expenses list what could be trimmed or slashed? Look for ways of completely getting rid of any expenses you can. Are there changes to your processes or systems that could eliminate anything?  

If your P&L shows a category of “General Expenses,” this is often a catch-all category that should be investigated. General expenses may hide items that people feel don’t have a home, and every expense your business makes should have a sensible category name to ensure report reading is as easy and accurate as possible.  

If you use Xero, you can run as many P&L statements as you like! And to get further details on each income or expense category, you just need to click on the dollar amount and the app will take you to the list. It’s very interesting reading!  

What do I do with a Balance Sheet?  

Your balance sheet shows your current equity in your business – or the value of your business if you were to dispose of your assets and pay down all debts. It details the dollar value of your assets, your debts, and your net worth. Cash you have, money you are owed, things you own are in the asset list. Debts and obligations like loans and leases are liabilities.  

Your equity is what’s left over from deducting the liabilities from the assets. This is essential knowledge you need if you are looking to borrow or restructure your business.  

The Balance Sheet can show you how much of your business is funded by debt. It may be ideal that your equity is a positive, but the reality is that sometimes we need to borrow funds for new equipment, cars, or staff. A balance sheet will help you in seeking loans or showing if you have too much debt (over-leveraged.)  

Lastly, a Balance Sheet will help you determine if you have enough money to cover unexpected short-term expenses, as it details money owed to you as well as money you have on hand.   

Now What?  

The more you understand the trends of your business, the faster you will be able to problem solve, the better you will understand urgent versus important problems, and you will be able to create the business of your dreams.  

Business isn’t just about money. It’s also about family, health, and enjoying life to the full, especially in Karratha with the best and biggest backyard in Australia to explore.  If you’re ready to start building your dream future, talk to us at Northwest Accountancy to find out how we can help you get there, from bookkeeping to coaching, we’re here for you and your business.  

Give us a call on 08 9185 9400 or drop an email to Helen at [email protected]