For an entrepreneur, finance cannot be a set of numbers nobody understands. These are the indicators an owner manages the business by. Let us work out which of the existing financial reports matter most, and what you cannot afford to overlook when making decisions.
Almost every entrepreneur has run into the situation where the money is there, yet somehow it is not there at the moment the bills come due. How do you find out why a cash gap appears, whether the business is doing well, how much real profit the work brings in, and how to fix things when you are running at a loss? There is no need to panic. It is enough to understand how to keep your financial records properly — and three main reports will do that.
An entrepreneur’s financial accounting fits into three reports: Cash Flow, P&L (the profit and loss statement) and the balance sheet.
Cash flow
Cash flow shows the movement of money — how much the company actually receives and spends over a given period.
What matters about cash flow:
- it covers every bank account and cash desk in the business;
- it shows how much money there was at the start of the period, where it came from and where it went;
- it shows which expense categories the money went to, and what is left on each account;
- it is prepared on the cash basis;
- it is useful for spotting money spent carelessly, because a spike in any expense line is immediately visible.
The cash flow report breaks money movement down by individual line items, which is what makes management decisions possible. It lets you see the balances on specific accounts, understand why they are what they are, and trace where money came from and where it went. Its data is then used to plan future spending.
The profit and loss statement (P&L)
The P&L shows the difference between revenue earned and costs incurred over the period you need. Within seconds it tells you the result of your activity — profit or loss.
What matters about the P&L:
- it covers all accrued income and expenses;
- it is needed to analyse how efficient the business is;
- it is prepared on the accrual basis;
- it shows the profit for the reporting period;
- it reflects the profitability of the business.
The P&L also shows which line of business carries the highest costs and the lowest income, and which is the other way round. Once loss-making directions are identified, the owner can act before cash gaps appear.
The balance sheet
The balance sheet shows how many assets and how much debt the company holds at a given date. In plain terms it sets out the main characteristics of the business: the assets the company owns (buildings, accounts and so on), the liabilities it has to settle (loans, bills payable) and the equity — the money the owner has put into the business.
Assets = liabilities + equity
The balance sheet partly answers the questions “where is the money?” and “can we spend it?”.
Reading the reports and deciding quickly
So what does analysing these reports actually give you?
- Reporting stops you making mistakes, because it lets you see the business as a whole.
- Cash flow makes it easy to track where money goes and to break income and expenses down by category.
- The P&L shows which lines of business feed the company — what exactly you earn on.
- The balance sheet weighs the liquidity of your assets against how soon your liabilities fall due.
And to finish: QUINCEFIN is a service where running your business, generating these reports and making the right decisions is simple. It has everything you need to produce financial reports in a couple of clicks, save time, avoid financial surprises and draw conclusions for the next stage of growth.