Essential financial reports
The balance sheet and profit and loss statement are the two essential and key financial reports that play a crucial role in managing your business successfully. They provide valuable information and insights for decision making and assessing the financial health of your business.
Understanding these reports and reviewing them regularly helps you make more informed financial decisions, monitor your company’s progress, and identify potential areas of concern.
Furthermore, using an accounting software package will make managing your financial records and producing financial reports much easier. Learn more below:
The balance sheet
The balance sheet, the first of the two key financial reports, provides a snapshot of a company’s financial position at a specific point in time. It provides a summary of the company’s assets, liabilities, and shareholders’ equity. The balance sheet follows the accounting equation: Assets = Liabilities + Shareholders’ Equity.
The balance sheet is divided into two main sections, split between the assets section and the owner’s equity and liabilities section. The fixed assets section details what the business owns, such as property, equipment, and investments. Current assets include cash, stock, debtors, or accounts receivable. The other section of the balance sheet consists of the debt and liabilities, and retained income of the business. Liabilities are typically divided into long-term liabilities, such as business loans, and short-term liabilities which are payable within a year. Short-term liabilities typically consist of creditors, accounts payable, and accrued expenses.
Shareholders equity equals assets less liabilities and reflects the owner’s investment in the business plus retained income.
The balance sheet provides valuable information about a company’s financial health, liquidity, and solvency. The balance sheet aids stakeholders, such as investors, creditors, and management, to assess the company’s ability to meet its financial obligations and evaluate its financial performance.
The profit and loss statement
The profit and loss statement, or income statement provides a summary of your business income, cost of sales, overhead expenses, and net profit or loss for a specific period. Reviewing the profit and loss can help you evaluate the financial performance of your business and identify areas where you can improve efficiency and increase profitability.
The profit and loss statement consists of turnover or sales, less the costs of sales, which are the costs that are directly attributable to producing the products that are sold. Sales less cost of sales equals the companies’ gross profit. The next section of the P&L details the operating or overhead costs of the business. Operating costs are deducted from the gross profit providing the net profit figure for the business. Finally, deducting the tax liability from the net profit gives the net profit after tax.
Financial report examples
Financial reporting terms
Turnover
Turnover or sales, is the total sales value (selling price) of the goods and services that the business has sold.
Cost of sales
Cost of sales is the cost of raw materials used to produce the goods and other costs that are directly attributable to the production of the goods.
Gross profit
Gross profit is the turnover or sales less cost of sales.
Operating expenses
Operating expenses are the general running costs of the business, such as salaries, rent, stationery, electricity, water, etc.
Net profit
Net profit is gross profit less the operating expenses of the business, or sales less cost of sales less operating expenses.
Fixed costs
Fixed costs are business costs that do not change with an increase or decrease in the number of goods produced. These are costs that a business is committed to pay, such as rent.
Variable costs
Variable costs are costs that increase or decrease with changes in production levels, such as raw material costs.
