Try as you may, there’s no way to dress up accounting reports: you could stick them in lingerie and they wouldn’t be sexy, you could whack a novelty nose and glasses combo on them and they wouldn’t be funny, what they are though is unavoidable; keeping good records is vital for every business, not just to keep on top of your taxes, but to help manage costs, for legal and regulatory reasons, and for a visual map that you can refer to help grow, expand and better your business overall. These five reports are your best friends; nurture your relationship with them and you’ll reap the rewards.
Profit & Loss Statement
All profit and loss statements (P&Ls) adhere to a basic formula: sales minus costs = profit. The aim of the statement is to summarise the sales and costs that your business has incurred during a specific period (usually a financial month, quarter or year) thus providing information about the company’s ability to generate profit by increasing sales, reducing costs, or both.
Typically, sales are shown at the top of the P&L, costs are shown below sales and profit – ‘the bottom line’ – is below those at the bottom. And just to clarify, sales can also be referred to as revenue or income, costs can be called expenses, profit can be called net income and P&Ls can also be referred to as income statements, statement of operations, statement of financial results or income, earnings statement, or expense statement.
Your P&L will be broken down into various sections each with its own subhead and the sales and costs listed under those subheads can be broken down into multiple sources. For example, figures from a restaurant’s sales will likely come from customers who dine in, those who take out, and also from outside catering, and their costs will be broken down in a multitude of ways including rent, food, drinks, kitchen equipment and wages.
Besides this very straightforward breaking down of a P&L and its basic terminology, there are many other subdivisions to consider, and of course P&Ls will differ from business to business, so check out this brief glossary of essential terms to further aid your understanding.
An up-to-date snapshot of your company’s financial position, a balance sheet will show the resources that your company owns and owes, as well as the sources of financing for those resources.
‘Assets’ typically include bank balances, accounts receivable (claims for payment held by a business for goods supplied and/or services rendered that customers/clients have ordered but not paid for – in simple terms: unpaid invoices) and any investment accounts, possibly extending to the inclusion of property, computers, equipment and other saleable physical and intangible property.
‘Liabilities’ refer to anything your business owes: credit cards, business loans and all the other crap that pulls you back to reality when you’ve woken up from a wild dream where you expanded and took over the world overnight.
Assets + liabilities = equity; so, in an ideal world, the difference in what you have and what you owe should be a positive number and one that grows over time. As well as being a great guide to help you identify trends throughout the year, monitoring the changes on your balance sheet is the most effective way to keep track of your business’s income and expenses in order to keep afloat successfully; it’s the first report that banks will look at if you apply for any funding and should help them paint an accurate picture of how their funds will be used by your business and what kind of returns they can expect to see down the line.
Accounts Receivable Aging
If you are happy to slog your guts out solely for the benefit of others, you’re not doing it right (unless you’re a charity, in which case fair play and thank you). No one should be expected to work for free (or on zero hours contracts if you ask me, but let’s not go there today…), but doing the work and then sending the invoice is just the start – you of course need to make sure those invoices get paid.
Cue the wondrous accounts receivable (A/R) aging report, which gives you the skinny on who’s paying what and when, so you can keep your eyes peeled for the always-late-payers, the usually-on-timers, the why-have-they-suddenly-started-paying-laters, and the lesser spotted always-on-timers (top tip: buy them a gift once in a while).
When it comes to collecting payment, it’s fair to give all clients a level playing field and most A/R aging reports are categorised per client/customer into current (due date), 1-30 days overdue, 31-60 days overdue, 61-90 days overdue and >90 days overdue (otherwise known as cold sweats) – it’s an effective and clear-cut way to keep track of your cashflow.
Poorly managed accounts receivable = poorly managed cashflow because the more cash you have locked up in late payments, the less cash you have to run your business to its full potential.
Revenue by Customer
Your A/R aging report will tell you who owes you money, but it’s just as important to keep an eye on who’s giving you the most (buy them a gift once in a while too). Doing exactly as it sounds it should, your revenue by customer report shows you how much money you’ve made from each of your clients over a period of time. Both professional services businesses and freelancers rely heavily on repeat business, which is why excellent customer service is as key as delivering what you say you will when you say you will – a great relationship with your clients will almost always convert into reliable income streams.
That said, be wary of the big bad wolf aka revenue concentration risk, which is when you rely on one income source too heavily. Say your eggs are all in one basket and that basket breaks, would your business go under? If so, you need to focus on building client relationships and a strong customer base across the board – your revenue by customer report is an excellent resource for identifying those clients that could do with a little more of your time and attention.
Accounts Payable Aging
Accounts receivables’ less popular brother, your accounts payable will tell you to your face who you owe money to and how much you owe them. Practice what you preach here and avoid being an always-late-payer – if your books are updated and you’re on top of your cashflow, you can organise your accounts payable by due date and make sure you always pay on time. You never know, they might even send you a gift…