Tradies Tax is here to give you 6 reasons why it is important you review your financial reports, to help attain trades business success.
Making time to look over your financial reports each month is an important task for any business owner, including trades businesses.
If you are not taking the time to do this; either because you are too busy, or you do not quite understand what you are looking at, in this blog we will discuss 6 reasons why you should start to look at these reports. If the reports do not make sense to you, Tradies Tax is always here to help.
Before we discuss these 6 reasons, it is important to acknowledge which reports to look at. At the bare minimum, and also depending on the complexity of your trades business, the reports you should be looking at include:
The Statement of Financial Performance
This is also known as the Profit and Loss report (P&L) or the Income Statement. It tells you how your business is performing over a period of time, such as a month or a financial year.
In broad terms, it shows the revenue that your business has generated, less the expenses for that same period – effectively, showing how profitable your business is.
The Statement of Financial Position
This is also known as the Balance Sheet, and it shows the value of the business’s Assets, Liabilities and Equity.
- Assets include things like money in bank accounts, plant and equipment, machinery, accounts receivable balances.
- Liabilities include things like bank loans and credit cards, accounts payable, and hire purchase balances.
- Equity is the difference between your assets and your liabilities and includes retained earnings and owner funds introduced.
Accounts Receivable Ageing Report (Aged Receivables)
This report shows how much money is still owed to the business at a certain date in time and is usually segmented as to how overdue they are, or sometimes by how far past the invoice date they are. Generally, you will have Current, 30-, 60- and 90-day columns.
Accounts Payable Ageing Report (Aged Payables)
This report shows who the business owes money to at a certain date in time and, like the Accounts Receivable Ageing Report, is usually segmented by the overdue period.
Why Look at Your Financial Reports?
1. Gain a better understanding of your trades business.
By looking at your Profit and Loss report monthly, you will get a good picture of how your business is performing month by month, and it will give you a better understanding of what makes up your profit. It can be helpful to compare periods, or to look at a month-by-month P&L, so you can clearly see on one page the revenue and expenses each month. This will help in identifying trends in your data and may also help highlight anomalies in coding/categorising.
2. Get accurate information for lending purposes.
If you are applying for a loan or an overdraft, the bank or financial institution will look closely at both your Profit and Loss report and the Balance Sheet, as much can be learned about a business by looking at these two reports together.
3. Get paid quicker and reduce bad debts.
By looking at your Accounts Receivable Aged Summary each month, you can follow up with overdue accounts promptly which often results in getting paid quicker. The longer an overdue amount is left unpaid, the higher the risk of it not being paid at all, so it is important to keep on top of this.
4. Create a better relationship with your suppliers.
Assuming you are entering your supplier bills into your accounting software (at Tradies Tax, we recommend using Quickbooks, Xero, Reciept Bank and Spotlight Reporting as your accounting software) your Aged Payables Report will alert you to any unpaid or overdue amounts. Supplier relationships are a primal aspect of a trades business, and paying on time is crucial to maintaining those relationships.
5. Create a better cashflow.
Having an accurate understanding of how much money your business is owed, and owes, can help with cashflow planning to ensure that there is enough money when needed. Additionally, understanding the trends of your business, its profitability drivers, expenses, etc., can help to plan sales and marketing campaigns so that the revenue keeps coming in.
6. Make better business decision making.
Your financial reports tell the story of your business, and it is important that you understand the story that they are telling you. The better you understand what is going on in your business, the stronger the position you will be in to make better business decisions that affect the profitability of your trades business and its financial viability.
If you would like to know which reports are relevant to your trades business, and gain a better understanding of your businesses financial performance, contact Tradies Tax today so we can review this with you.
This blog was originally published by BOMA, but has had edits made by Tradies Tax for the benefit of our readers.