P&L, BS, AP… EBITDA???
So many acronyms for a profession that relies on numbers!
To the non-financial minds, these letters can be as confusing as the numbers themselves. What do all these terms stand for and do you need them for your business?
Unless you have a decent level of training, even accounting basics can be hard to wrap your head around. However, there are some concepts you need to understand in your role as a business owner. This is regardless of whether you outsource your bookkeeping and accounting or handle it in-house.
Financial statements are one of the most important aspects to understand. They include your Profit and Loss report (P&L), the Balance Sheet, and the Cashflow Report.
These three integral accounting reports are used to assess the financial performance and status of your business. Though they are all interconnected, each has a specific focus and purpose.
Today, we will walk you through each one, explain why they are important, and how each is used.
Why Does My Business Need These Accounting Reports?
Using these three statements, you can get a thorough look at how your business is doing financially for a certain period. It helps you to see what is coming in, what is going out, where the business is performing and where it isn’t. This allows you to make adjustments if needed, and get a clear idea of what’s going right and wrong.
These accounting reports also form a strong basis for proof of your trading. You will need to use these reports if you are approaching investors or requesting a loan from a financial institution.
Profit and Loss Statement (P&L)
Also known as an income statement, this document shows you exactly how your business has performed over a selected time frame. It can be useful to refer to this statement when you want to look at the main areas of the business that draw in the revenue or if you need to look at how to cut costs.
The data shown will include revenue (the money you earned), expenses (money you spent), and net profit (how much you made minus how much you earned.) It is important to understand that profits are not the same as cash flow. Your business can appear profitable on the P&L statement yet not creating cash flow.
You can use the P&L statement to make important decisions for your business, like whether you should be increasing production or removing a certain product or service.
A balance sheet gives a “moment in time” glance into the financial position of your business, rather than over a certain period. All three facets of the statement (assets, liabilities and equity) must balance (hence the name!)
This statement is handy to get a snapshot of what is happening with your business in between reporting periods.
Cashflow reports, unsurprisingly, track the flow of cash into and out of your business over a specific time frame. They can be compared to bank statements and are useful for showing issues or patterns you need to be aware of.
This report gives a more accurate indication of your available cash than the P&L statement. That is because it leaves out information on income that hasn’t yet arrived and expenses that haven’t yet been paid.
The data shown will include cash flow from operations, investing, and financing, a closing cash balance (a total of the above three areas), and net change in cash (the difference between your opening and closing cash balances).
Running Your Accounting Reports
Your bookkeeper or accountant should generate these reports for you on at least a quarterly basis, but you can also request them at any time. If you have an online accounting software like Xero, then you can run the reports yourself for a quick check-up on the finances.
You don’t necessarily need to understand the ins and outs of these reports, but a basic understanding is helpful to know your financial position. They are an important way to gauge how your business is doing on all levels, and essential in making any financial decisions.
A key part of keeping these reports accurate is nailing your financial basics. That is where it can be really helpful to have a bookkeeper. Your bookkeeper will ensure your accounts and reconciliations are up to date and entered correctly. That way, when your accounting reports are run, you will get a true picture of where your business is at.
Here at Admin Army, we specialise in high quality, accurate bookkeeping. Get in touch with us today to see how we can remove the stress from your day to day finances.
Still happy to take care of your own bookkeeping?