Does accounting jargon fill you with dread?

Does reading your monthly finance reports leave you yawning and reaching for a bottle of wine to drown your sorrows?

Years ago when I first started in business I'm sure my accountant hated meeting with me as much as I loathed our monthly "counselling" session.  I always felt so deflated when I left our finance team meeting but only because bookkeeping, accounting, debits and credits were all so new to me and I hadn't grasped the potential.

If you are in business for the low haul you will need to fall in love numbers and master your finances.  Ideally each month you need to review in detail the following reports with your Bookkeeper.

PS: wait till you finished reading below before you open that bottle of wine and no whining. You can do this!

Profit & Loss Statement – this is the most commonly looked at report but it’s not always a true representation of your business. Once your Bookkeeper has reconciled your bank statements and credit card transactions, the P&L or Income Statement shows money that has been received and spent. However, you need to run this report on an accrual basis to really know if you made money or not. A Profit & Loss Statement run on an accrual basis as opposed to cash basis (money in and out according to your bank statement only) is a more accurate representation of how much profit you actually made. An accrual based P&L will capture all of your income (all invoices raised) and all expenses entered (your Accounts Payable ledger) for the month. The net position (Income – Expenses) is your profit. Be mindful however that this profit is not your take home stash. Depending on your tax structure you will still need to pay tax on the profit.

Balance Sheet – this report seems to scare most business owners but it’s one of my most loved reports. At the end of each financial year, profit that you’ve made as shown on your Profit & Loss Statement is also reflected on the Balance Sheet as “Current Earnings”. In business you want to continue to increase the value of your business, so aside from spending less than you earn (net profit) you also want to make sure that the sum of all of your assets (money in your bank account, value of your stock and monies owing to you from debtors) is greater that the money that you owe banks and creditors. As a business owner you also want to manage how much you pay yourself from the net profits of the business, after tax. This is typically shown as a Liability on the Balance Sheet called “Drawings”. Looking at your YTD drawings total each month is critical as many business owners under-estimate just how much money they’ve actually spent. The more money you make, the more debt you to pay down and the better you manage banking and debtors the stronger the financial position of your business will be. The Balance Sheet is an amazing story that you get to mould when you start playing with the numbers in your business.

Statement of Cash Flows – this report is literally as it suggests. It’s a report that shows the timing of money as it flows in and out of your business/bank account, highlighting where your money is coming in from and going out to. Most people don’t realise that there is ALWAYS a pattern in personal and business spending. Are you spending more money that you are bringing in? How is your cash flow primarily funded?  Sales, overdraft or investment income?  At what times of the month do you have more money? When are you paying out the most money each month?