When it comes to reading the financial statements provided by your accountant, it’s not always easy to understand. Terminology can be unfamiliar and having a clear sense of what the numbers mean can be difficult. There’s a lot more to consider in your financials than just the bank balance!
It’s important for business owners to understand that the primary reason for preparing financial statements is to help make decisions about their business.
Below are 10 tips to help explain your financial statements:
- The ‘accounts’ method– for businesses of reasonable size, financials will be prepared using this method. It means your income and expense balances include more than just cash transactions, so the overall profit or loss figure is not a representation of how much cash was gained or lost during the year.
- Gross profit and net profit– it is important to understand the difference here. Gross profit represents the profit generated from the core business function (i.e. selling goods or providing services). The net profit, often referred to as the bottom line, is the gross profit less all overhead expenses.
- Non-cash items– these are expenses where no cash has been outlaid from the business. For example, depreciation and movement in leave provisions will affect your net profit/(loss) however these are non-cash items. As such your net profit/(loss) may be lower than what you were expecting due to these non-cash items.
- Income tax expense– the tax expense related to your taxable business profit for the year.
- Current assets– all assets of the business expected to be realised within 12 months. This will include accounts receivable/debtors which is money that customers owe the business.
- Fixed assets– all property, plant and equipment, furniture and fittings of the business. These items are usually subject to a depreciation claim (non-cash expense item).
- Current liabilities– all liabilities of the business to be paid within 12 months.
- Accounts payable/creditors– money that the business owes to suppliers.
- Non-current liabilities– all other liabilities of the business longer than 12 months.
- Equity = net assets – total assets minus total liabilities of the business. If equity is positive, then the business assets are greater than the business liabilities and if equity is negative then the opposite applies and directors need to consider the solvency position of the business.
Understanding your business financials is not always an easy task. However, once you understand the terminology, you will find it a simpler process to comprehend your financial statements and the ongoing position of your business.
Contact your local Accru office to assist you in furthering your understanding of your business financials, which an office in every capital city, we are never to far away. Contact your local office now.