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Financial Reports: Making the Grade

Financial reports summarize a business record for a given period of time and are used by bankers, potential lenders and the ATO (Australian Taxation Office) to assess the worth and profitability of the business and check that it complies with legislation. While many business owners may view financial reports as another red tape headache, these reports are in fact a useful tool in analysing the performance of a business.

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The most commonly used reports are profit and loss statements and the balance sheets. A profit and loss statement shows the performance of the business including sales income, costs of sales, gross profit, expenses and net profit, while a balance sheet gives a snapshot of the worth of the business at the end of a period and includes the assets and liabilities of the business and the resulting equity.

Here’s 10 questions to help you use your financial report to gauge your business’s financial health and future potential.

  1. Has revenue increased in comparison to the previous period? If a business increases its revenue by volume, then expect a resulting increase in costs. However, if revenue increases came via price increases, costs should not increase.
  2. Did the gross profit increase for the period? Gross profit is what you sold your goods and services for less what they cost you. This figure is an indicator of the mark up or trading profit of a business.  
  3. Did overheads increase significantly and in which areas? Overheads are expenses not directly associated with selling or providing your services but are required for carrying on the business, such as advertising rates and vehicle costs. Identifying potential rises in overheads will allow you to plan sound future financial strategy.
  4. Did the net profit increase for the period? After taking everything into account how much did you end up with and how has that changed compared to the previous period? In many ways this is the bottom line, the simplest measure of a business’s short-term financial growth or loss.
  5. Are any increases in assets or liabilities consistent with business growth? Increases in assets including cash at bank or trade debtors should be measured against an increase in revenue.
  6. Can the business pay its debts? Are your assets greater than your liabilities? It is especially important to look at liquid assets such as trade debtors and cash at bank, which can cover potential liabilities that may suddenly arise.
  7. Do we have any non revenue generating assets or liabilities? You need to compare the value of these against the performance of the business.
  8. Is the business utilising its assets? Look at how quickly the operational assets generate sales and if the efficiency of the assets can be improved to generate more revenue.
  9. What’s the return on the capital invested in the business? Check the performance of the stock market and other types of investments and evaluate if money invested in the business have been better utilised elsewhere.
  10. Did you generate any extraordinary profits or losses? These are once off activities the business has undertaken that are not part of the normal trading activity of the business (e.g. sale of assets). These may distort your results if included in your analysis.

Jan Wrack is a MYOB certified consultant with Millbrook Accounting Software Solutions. Information is provided as a guide only and should not be relied on as a substitute for seeking professional advice relevant to your circumstances.

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