How to understand your financial statements
As a business owner you know that understanding your financial statements is important. You have vital information about the health of your business at your fingertips, but if you don’t know how to read it, or interpret what you’re reading, you’re missing out.
How can this information be used to save you money and grow your business? We created this guide to help you understand your financial statement and empower you to make informed decisions.
Reports that make up your financial statement
Imagine a financial statement as a photograph of your business at a specific moment in time. It tells you what you own, what you owe, and how well you’re doing. It can tell you where your money went and how you made money over a specific time period.
1. Your trading account: A magnifying glass on your core business
Your trading account focuses on your sales and the direct costs involved in making those sales.
For example: If you run a bakery, it tells you how much you earned from selling bread and the cost of flour, eggs, and other ingredients.
2. Statement of profit & loss: Your financial performance
Your statement of profit & loss, or income statement, tells you how your business performed over a period, such as a month or a year.
- Revenues: The money you earned from selling your products or services.
- Expenses: The costs you incurred, such as wages, rent, and supplies.
- Net Income: Your profit or loss, showing what’s left after all revenues and expenses.
3. Balance sheet: Your financial snapshot
Your balance sheet gives you a clear picture of your financial position “as at” a specific moment.
- Assets: What you own, such as cash, equipment, and inventory.
- Liabilities: What you owe to others, like loans or unpaid bills.
- Equity: What’s left for you, the owner, after all debts are paid.
Think of it as a financial selfie, capturing everything from your cash to your outstanding loans at a particular moment.
4. Statement of changes in equity: Your ownership changes
Your statement of changes in equity tracks how your ownership in the business changes over time.
It can show new share issuances, dividends, and changes in retained earnings. These show how your stake in the business has changed due to profits, losses, or other transactions with owners.
5. Shareholder current account: Transparency between business and shareholders
If your business has shareholders, your shareholder current account is a record of transactions between the business and its shareholders.
For example: If you, as a shareholder, lend money to the business or receive money from it, those transactions are recorded here, keeping everything transparent and clear.
While not a standard part of the financial statements, this account keeps track of transactions between the business and its shareholders. It is usually included in the notes or supplementary information accompanying the financial statements, especially in companies with multiple shareholders.
Why financial statement analysis matters to you
You might wonder why financial statement analysis is essential. Here’s a few reasons it’s a useful business practice.
- Spot trends: By analysing your financial statement, you can pick up on trends, such as patterns in sales growth or irregular expenses.
- Make comparisons: You can compare your business to others in your industry or track your progress against your goals.
- Identify risks: You can spot potential problems before they become major issues.
How to analyse your financial statements
You don’t need to be a financial expert to analyse your financial statement. That said, working with an outsourced CFO can really help you get into the more complex items, help you cut back on unnecessary costs and put in place measures to save on tax.
Key things you should look out for
- Start with clean data. Make sure everything in your financial statement is accurate. If you mistakenly record an expense inclusive of GST, your expenses will be inaccurate and your analysis will be off. This is a great example of why you should never underestimate the value of good bookkeeping services in Australia. As the saying goes; garbage in, garbage out.
- Look for trends. Are your sales rising or falling? Are your expenses creeping up? What does that tell you about your business? Are expenses moving in line with your sales and budget?
- Use ratios. Ratios can help you understand complex information. For example, the current ratio (current assets divided by current liabilities) tells you if you have enough money to pay your bills.
Tips for effective financial statement analysis
Here are some practical tips to make financial statement analysis easier for you:
- Use technology: Choose accounting software that integrates with other apps and tools. This will really help you simplify your operations. You can capture expenses in real time and ensure that your records are accurate. Creditte chartered accountants & advisors is a platinum partner with Xero –and can help you get setup or migrate your outdated accounting system to the cloud.
- Ask for help: Make a plan to meet regularly with your accountant to get their expert analysis and opinion of your financial statements. It’s always good to have a professional and unbiased opinion.
- Keep learning: The more you learn about financial statements, the more empowered you’ll be to make smarter business decisions.
Understanding your financial statements should be a regular part of your business strategy. If you’re not getting the financial information you need to run your business well, contact us today and let’s help you crunch the numbers together.
FAQs
What does 'as at' mean in accounting?
Understanding your financial statements should be a regular part of your business strategy. If you’re not getting the financial information you need to run your business well, contact us today and let’s help you crunch the numbers together.
What does 'for the period ending' mean in accounting?
“For the period ending” refers to a time frame or duration, typically used in income statements or cash flow statements. It indicates the end date of the period over which financial activities are summarised, such as “for the period ending 31 December 2023,” encompassing activities from January 1 to December 31 of that year.
Does my business need to prepare financial statements?
Yes, your business needs a financial statement. It provides essential insights into your business’s financial health, helps in making informed decisions, and is often required for tax reporting, obtaining loans, and attracting investors.
