Having accurate and organized books also makes it easy for businesses to provide records requested by HMRC, investors or lenders. This prevents penalties, fees and possible delays in operations.
Profit and Loss Statement
A Profit and Loss Statement (totals a company’s sales during a period. It subtracts all expenses related to that revenue to provide key metrics regarding the business’s performance. Businesses can complete a profit and loss statement monthly, quarterly or annually. Using an automated system to compile and organize this information can make it easier for small businesses to keep track of these metrics over time and identify improvement areas — such as increasing sales or reducing costs. Bookkeeping reflects the financial impact of all transactions and helps companies make informed decisions. Companies rely on this data for budgeting, planning expenses and managing debt.
A P&L is one of the three primary financial statements that all businesses should prepare and update regularly. Internal management and external parties, such as investors and lenders, use these records to gauge a company’s ability to generate profit through increased revenues or decreased expenses. P&Ls come in several forms, including condensed, single-step and multistep, and include granular data like revenue categories, cost of goods sold, gross profit margins and operating expenses.
The balance sheet, also known as a “statement on financial position” or “statement on owners’ equity,” provides a snapshot at a given point of the assets, liabilities and net worth of a business. The balance sheet shows current and non-current asset categories and a breakdown for each type. For example, it will show cash and investments. The report also includes an analysis of each asset category, such as cash or investments, along with current and long-term liabilities, equity reserves and paid-in capital.
The static nature of a balance sheet may only give a partial picture of the overall financial health of a business without context, comparisons, or benchmarking. Different accounting systems and how they handle depreciation and inventories will also affect a balance sheet. Paying attention to footnotes will help managers identify red flags indicating manipulation. A balance sheet, combined with more dynamic information from the income and cash flow statements, can give a better picture of an organization’s health.
Cash Flow Statement
Even a profitable business can run into trouble if there needs to be more cash on hand. This is why a company must prepare a cash flow statement to reconcile the information recorded on an income statement (which uses accrual accounting) with the actual cash flow in and out of the business. Most companies hire a bookkeeper to do this for them.
This document is divided into three sections: cash flow from operations, investing, and financing activities. The operating section reviews the flow of cash related to core business activities such as product sales, salary payments and rent expenses. The investing section reviews the purchases and sale of long-term assets like machinery, and the financing section examines money received from selling stock or paying back loans and cash invested in buying stock, loans or short-term debt.
The statement of cash flows is an extremely important tool for current and potential investors and lenders. It lets them see how much money is coming in and leaving the company and forecast future cash flows based on previous results.
Statement of Cash Flows
The statement of cash flows is a detailed report that shows how much cash your business has coming in and going out. It is often a more reliable indicator of company health than net income.
The first section of the cash flow statement, operating activities, reports how much your company brings in from its core business operations. It includes cash from sales and the cost of goods sold. The second section, investing activities, reports the money your company receives from selling or purchasing long-term assets like property, plant and equipment. The third section, financing activities, records the cash your company receives or spends on debt and equity financing.
This is one of the most important financial statements for managers and owners because it provides a detailed look at how your company uses cash and where it comes from. It also helps managers and owners discern trends in the company that may need to be apparent from analyzing the profit and loss statement alone.