What Is Your Financial Data Telling You?
Do you know your way around a cashflow statement? Are you able to understand a balance sheet with a single glance and effortlessly pull data from a profit and loss report?
Do you know what these reports are, how to produce them, or what the financial data they contain even means?
If you answered no, you’re not alone. Not every business owner is a whiz with numbers, and many decide to leave the financial nitty-gritty to someone else. However, even if you have a professional in charge of your bookkeeping and accounting, it’s important to have at least a fundamental comprehension of your financial data. And it’s not as confusing as you may assume. With just a few simple reports and some basic knowledge, you can understand exactly what your numbers are telling you about the state of your business.
Let’s look at why you need to analyse your financial data, which reports are the most important, and how to make sense of it all.
The Importance Of Analysing And Understanding Your Financial Data
Do you really need to understand the intricacies of your accounting data to run a successful business?
As long as you have money in the accounts, does it really matter?
While it does make sense to outsource some of your core financial management tasks, it’s still vital for business owners to take an active interest in the data.
Compare it to owning and using a car. You don’t have to know exactly how every piece of machinery in the car operates, but you do need some key information to ensure your vehicle runs reliably and doesn’t break down in the middle of nowhere.
What You Need To Know
At the bare minimum, you need to know how much petrol is in the tank so you can make informed decisions about how far to drive. You also need to know how and when to gas up when you’re running low.
Cars have dashboard dials and digits to make it all easier, and your business has all the essential info available to you too. You just need to know where to look for it.
There’s much more to your accounting than the amount of money you have in the bank at any given time. Without a clear understanding of your financial data, it’s difficult to make the right decisions for your business.The metrics in your reports hold vital information that can help you manage your cashflow and inventory, scale your business, and prepare for the future.
The Essential Reports – and What They Can Tell You
Your financial reports tell the story of your business. They show you where you’ve been successful (or otherwise) in the past, help you manage your finances effectively in the present, and empower you to plan appropriately for growth and success in the future.
Here’s an overview of the most important reports to run and what information you can glean from each:
Budget : Think of your budget as your GPS. You’ve gathered and assessed the relevant data to create a roadmap of where your business is heading and how you plan to achieve your goals.
Your budget is a living document that you should refer to and regularly adjust to ensure you’re on the right track.
Cashflow Statement: Cashflow is the oxygen that keeps your business alive. It’s essential to maintain positive cashflow, where you have more money coming into your business than flowing out.
Your cashflow statement tracks this flow of money, allowing you to manage this ongoing process and achieve positive cashflow, meaning you have enough money at any given time to cover your costs.
Cashflow Forecast: When it comes to your business finances, surprises are generally a bad thing. You need to be able to predict the future as accurately as possible so you have time to take action when needed.
A cashflow forecast uses your existing data and projects it forward in time so you can pinpoint issues early and take action to fix them before they affect your business.
Balance Sheet: Your balance sheet shows you all your assets (what you own), liabilities (what you owe) and equity (accumulation of profits/losses) at a given point in time.
This snapshot reveals what your company is actually worth – vital information for making significant business decisions.
Profit and Loss Report: A P&L report is an overview of your business's revenues, costs, and expenses over a given (historic) period. Whereas the balance sheet is a snapshot, your P&L is more like a moving video. A profit and loss report is useful for analysing trends and using the data to improve your financial management.
Don’t Neglect Your Other Important Data
There’s another set of numbers you need to stay on top of for your business too - your inventory data.
Accurate inventory management is vital to business success. Get it wrong, and you could impact your cashflow and reduce your profits.
In the last 12 months, 81% of consumers have been faced with businesses that have run out of stock. For those businesses, this translates to lost sales and potentially lost customers.
An inventory management system is an excellent way to save time and ensure your data is accurate and up to date.
These systems help you keep track of your inventory with a centralised view of your stock, provide you with a means of analysing your inventory and controlling your costs, and give you the information you need to plan and forecast your inventory requirements.
How Much Do You Know?
Your financial data doesn’t have to be confusing and overwhelming. When you understand the fundamentals, you have the knowledge you need to make better decisions about your business, even during uncertain times.
And just because you understand your finances, it doesn’t mean you can’t have an expert take on the bulk of the burden for you. A bookkeeper is an essential member of your team, looking after the daily financial functions of your business.