Last week we talked about using an accounting software package to keep track of your income and expenses of a business. This week I want to talk about how those software packages can generate reports so that a business owner can stay on top of how the business is truly doing. I know many business owners just look at the checkbook balance and how far they are booked out with jobs to get an idea on how the business is doing, but there is so much more information that the reports can give you. This podcast covers Financial Statements and information you need to keep an eye on.
LET’S START WITH THE DIFFERENT TYPES OF FINANCIAL STATEMENTS THAT ARE AVAILABLE.
- There are two main statements – balance sheet and profit and loss statement (also known as the income statement).
- But there are a lot of other statements, such as the accounts receivable (report showing customers who owe you money), accounts payable (report showing who the business owes money to) and other customer/vendor reports.
WHAT DOES THE BALANCE SHEET SHOW?
- This report shows what the company owns and who the company owes.
- This report gives you a good snapshot of where the company is on any given day.
- If the company assets (what is owned) are more than the company liabilities (what is owed), it tells us that the business might be in pretty good shape.
WHAT ABOUT THE PROFIT AND LOSS STATEMENT?
- This report shows how the business is doing year to date.
- It shows all the revenue that a company generates compared to all the expenses.
DO THESE REPORTS SHOW ACTIVITY ONLY FOR THE CURRENT YEAR?
- They can, but most software companies also allow a business owner to show a prior year comparison. This is where I think a lot of value can be found.
WHAT BENEFIT DOES THAT PROVIDE?
- By comparing the data from the current year with the data from last year, a business owner can really see if the company is doing better or worse than the previous year.
- Then the business owner can change course if needed.
- It also is a great way to compare expenses between this year and last year to see if any expenses are higher than last year that may need to be investigated.
- Without this comparison, the company may have some cost creep that the business owner was not aware of.
- It also allows a business owner to stay on top of costs now, rather than at the end of the year when they are doing their taxes.
MANY SOFTWARE PACKAGES ALLOW A BUSINESS OWNER TO DIG INTO THE NUMBERS A LITTLE DEEPER RIGHT?
- The answer is yes since all the data is in the system.
Be sure to talk to a tax professional if you have any questions about your Financial Statements.