Your financial reports are a numerical and mostly objective insight into the health of your business. When you learn to read and understand your financial reports, you are able to understand the real position your business is in, rather than your ‘gut feel’.
Below are 6 down to earth, no nonsense reasons why it’s good to understand your financial reports.
1. Is Your Business Surviving or Growing?
As any great business coach, like David Guest in Melbourne, will explain to you without actually knowing how much your business is making once you subtract out all the expenses, it’s pretty difficult to know if you’re surviving or growing. In learning how to read the Profit and Loss report your Accountant or bookkeeper prepares for you, you’ll be able to see straight away if your business is moving in the right direction. Growing!
2. Where’s All the Money?
Your financial reports are also able to show you where all your money is currently tied up. It could be all in the Assets your business owns and uses to operate, it might be mostly in the hands of customers who are still to pay their account to you. It may even be undesirably tied up with overdue bills and taxes you need to pay others.
No matter where it is, knowing about it gives you insight into the next steps you can take with your business. After all, if you had a problem with cash flow wouldn’t you want to know that your money is in the hands of customers who are late payers, so you could do something about it?
3. How is Money Being Spent?
When you’re no longer the only person in the business able to spend money, it’s vital that you be able to look at your financial reports and see that others are being as careful spending company money as you are.
Looking through your Profit or Loss and Balance Sheet with understanding what you’re looking at gives you a more reliable account of what’s going on behind your back.
After all, you can’t stand beside your managers or team members every moment of the day checking that they’re getting the best possible deal for your business at every opportunity – that just doesn’t work!
4. Does Your Business Meet Lending Requirements?
Imagine a fantastic opportunity comes your way; a once in a lifetime ‘game changer’. The only hurdle is you need to get a short-term injection of cash from somewhere to make it happen.
However, before you go cap in hand to the bank, investor or some other lender you need to be certain that the reports they ask to see are up to scratch and you look relatively low risk.
Without knowing how to interpret the information in your own financial reports how will you know if what you’ll be showing them is good enough for their checklist and to encourage them to hand over the money you need? Put simply, you won’t.
Even if you don’t know whether you’re an acceptable risk or not, you’ll still need to understand your own numbers so that if they come back to you with loan conditions you’ll be able to work out on the spot whether they’ll compromise your cash flow and future earnings or not. This really is a case of ‘knowledge is power’!
5. Can You Get Better Terms?
Nothing convinces a supplier to begin negotiations on better prices, terms of trade and preferential service than having a great story to tell with your financial reports. With your financial statements and your sound understanding of them, you’ll find it so much easier to convince suppliers to work with you under more favourable terms than your current situation.
In fact negotiation just about anything with a strong knowledge of your business position as evidenced by your financial reports is going to be easier.
6. Are You Able to Predict the Future?
Many business owners wish they had a crystal ball so that they could see what’s going to happen to them and their business next year, without ever realizing that they do – their financial reports.
Your financial reports are an overview of what happened in the last quarter or year that gives you a handy retrospective of what you’ve done and how your business has grown.
Your financial statements are also a powerful tool for analysing the future financial trends your company can expect to experience… Everything from cash flow to investments and important changes, allow an analysis of what you can expect in the future.
Without the knowledge needed for understanding your financial reports you’re really flying blind in your business. And while at first it can appear that it’s all Maths, with some guidance from a business coach or mentor you can turn those numbers into meaningful business strategies, decisions and results.
So take the time to talk with your trusted advisor about your financial reports and discover a whole new way of communicating the success your business is.