To be on top of your game it’s so important to be completely across the financial performance of your business. How you finance your business can affect your ability to employ staff, purchase goods, acquire licenses, expand and develop.

Your business financials are essential for lenders and investors who want to see hard figures before putting money into your business. Solid financials could help you get loans and attract investors.

It takes money to make money, so you have to consider your finances for many purposes, ranging from survival in bad times to bolstering the next success in good ones.

Financial statements are your ‘go to’ documentation as they contain important information about the organisation’s operating results and financial position.

The relationship between certain items of financial data can be used to identify areas where your business excels and, more importantly, where there are opportunities for improvement. Using, understanding, and interpreting these statements will help you make much better business decisions.

What to do

Financial statements are more than a simple listing of business income and expenses.

While these statements look at different aspects of the company, they’re interrelated and dependent on each other, as information from one is needed to prepare the others.

The key to understanding accounts is to have a good grasp of what the basic statements are there to do: how they are prepared, what they tell you, and what they don't.

Properly prepared financial statements can help you analyse your business cash flow, profitability, gross and net margins, debtor and creditor position, and the net asset position of your business amongst other things. 

Once you do this, you'll see that the total in your chequebook is not necessarily the income you have earned. There is far more to profit than actual deposits in the bank.

To really comprehend where your business stands, it is critical to look at certain financial statements. Financial statements are generated by first organising, and then analysing, numbers from your accounting activities.

The essential business reports required to analyse your business’ financial position include:

• The balance sheet – this is a record of your business' assets, liabilities, and capital, at a specific point in time.
• The profit and loss statement (or income statement) – this is the summary of your business' earnings, expenses, and net profit (or loss) over a specific amount of time.
• The cash flow statement – this will show the actual inflows and outflows of cash coming into and out of your business.

There are other financial statements that you may find helpful depending upon your specific business, but the above three will give you sufficient detailed information with which to begin. When you look at these financial statements, a lot of the mystery surrounding the finances of your business will disappear. In black and white, you will be able to see every  dollar that has come into your business and every dollar that has gone back out.

Key areas you should analyse on these reports

The cash flow statement is important because it allows you to see how readily your company can meet all its commitments as they fall due. A company can be profitable, but at the end of the day, if a lot of the revenue generated is from accounts receivable, the cash may not be available when liabilities fall due. Remember, "Cash is king".

Your P&L is important because it gives you an idea of how profitable your company is overall. Via P/L you can look at your margins and other ratios to see how it does in terms of generating profit relative to other players in the industry.

Your balance sheet is more of a long-term view, or track record of how the company is doing.

Make your analysis useful

The analysis is one of the most important elements of a useful financial report because it helps you understand the dynamics of the balance sheet. While you need your business to be profitable, you also need to sustain growth and have available resources to be reactive to changing customers’ needs and the changing market.

Effective financial management requires regular and systematic analysis of the financial records, tracking performance against budgets and targets and adjusting strategies and financial management to meet changing circumstances.

Your analysis should look at the assets used to generate profit including fixed assets and working capital. It should also consider the relationship of debt to equity in funding business growth. The analysis aims to highlight the relationship between operations and how you fund those operations.

Collecting and manipulating information in spreadsheets is simply not adequate for a growing business. You need to look for a system that will do the heavy lifting for you when it comes to gathering and analysing data.

You need a system that is capable of dealing with more complex information with less potential for error. Look for a system that can gather information from various sources such as Excel, MYOB, point of sale (POS) and till systems, rosters, inventory lists and budgets, then integrate and analyse the data into one report.

This system would be able to gather and analyse data and delivers insight on a real-time, daily, weekly or monthly basis.

A final note

Analysing your financial statements or reports is both essential and beneficial for your business, providing you with better visibility into your business’ performance.