The days of bringing a shoebox full of statements and receipts to your accountant for filing are long gone. The Best Practice for Business Owners today is to take advantage of the latest tools and technology to help manage and grow their business.
One of our favourite sayings for business owners is “Know Your Numbers, Grow Your Business” For a business owner to know their performance, they organise a regular review meeting with their small business accountants. This helps them to understand their financial reports, learn from their mistakes and use what they’ve learned to make better business decisions in the future. They will have Key Performance Indicators set for them, and these are managed throughout the journey. At the end of the day, you cannot manage something that you do not measure!!!
With that said, we’ve outlined the four essential financial statements business owners should review with their accountant at least once a month. If you don’t already have a great cloud-based Accounting System, the Team at MKS Group are experts in Xero and can help migrate your business to begin using this great system.
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Income Statement
Your income statement summarises all the funds received over a specified period, usually a month, quarter, or year. It shows both operating and non-operating income.
Operating revenue is money earned from normal business activities. For instance, if you own an e-commerce apparel retail shop, your significant operating revenue comes from inventory sales. On the other hand, non-operating revenue is money earned in ways that aren’t directly related to your business, including property sales, equipment sales, or investment returns. If you are a consultancy business or simply get rewarded for your time, then your income is the revenue you receive from your customers who pay for your time.
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Balance Sheet
The balance sheet is a document that lists your assets, liabilities, and equity. Assets equal liabilities plus owners equity (accounting equation: Assets = Liabilities + OE).
A balance sheet typically has two columns: one that lists your assets and your liabilities. Both columns should be balanced and indicate the same total profit or loss when the sheet is created. A balance sheet is a financial statement that shows how well your company is doing financially.
With the Balance Sheet, your Accountant can guide you through how quickly your customers are paying you and the time that it takes to pay your suppliers (usually measured in days). We always aim to improve these days to make sure you get to collect your income and keep a healthy bank balance.
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Cash Flow Statement
As a business owner (whether in e-commerce or any other business), a cash flow statement is possibly the most crucial document you can have. It shows every expense (e.g., rent, maintenance, and inventory) and every revenue source (e.g., every sale your company makes during a specific period). This statement also shows any payments made for the purchase of any assets, or payments made towards any liabilities (business loans, suppliers, GST Payments etc)
Not only do you end up with the Net Cash Flow position, but a great way to learn when you may need more money in the business, or better still, when you can take a dividend for your hard work.
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Inventory Forecast
Inventory forecasting is the process of estimating future sales volumes based on past and projected sales trends. It considers all your Stock Keeping Units (SKUs), sales velocity, and seasonality. This enables you to make informed decisions about how much inventory to order at any given time, which products to order, and when to order them. All of this has cash flow implications and if we get this wrong, the we could either lose sales (if we don’t have enough to sell), or be forced to sell at a lower price (if we have far too much stock)
Inventory management is both an art and science because you want to ensure that you have enough merchandise to meet any unexpected demand while not having too much extra inventory that sits unused in a warehouse or storage area.
If you have any trend-related items or have expiration dates, such as food, drinks, or supplements, this becomes much more critical to get correctly. Inventory management is critical when dealing with perishable items. The cost to your business can be devastating.
Any business selling inventory should consider implementing a reliable Inventory System – a couple of great systems are Dear Inventory and Unleashed. Both of these integrate very seamlessly with Xero and other Accounting systems too. They are very affordable and can a great addition to your business’s App Stack.
Get the Best Help for Your Small Business
By regularly creating and reviewing these four accounting financial statements, you can examine how well your Business’s finances are doing or uncover areas that need improvement.
If you don’t have the time or knowledge to understand financial accounts, our bookkeeping services Team can help. We can monitor your performance to give you more assurance and confidence in making short- and long-term financial decisions. Give us a call and let us know what we can do to help you! Remember – Know Your Numbers, Grow Your Business
(03) 9374 8400
