Many of our small business clients ask us to explain, in simple terms, what their Financial Statements really mean.
Of course if you ask an accountant these sorts of questions the answer can be very very long indeed! We love to talk about ratios, benchmarks, budgets, margins and even Internal Rates of Return (if you really get us excited). We realise that most of our clients are not familiar with these terms, and so accountants need to simplify our language.
So to start off; let us take a look at the Balance Sheet. Imagine you are able to walk into your business and take a photo of everything, a snapshot. If you look back at that photo in a month, you can see how much stock was on the shelves, how many computers were in the office, and even who was at work that day.
The Balance Sheet is just this, a photo of your business, taken on a particular day. It records everything the business owns (the assets), and everything the business owes (the liabilities).
And here is a real gem. If your assets are more than your liabilities, then this nearly always means you have made a profit, at that point in time.
From this one photo, we can tell how much our customers owe us, how much we have in the bank to pay what we owe, our stock level, and of course how much we owe to our suppliers. Think of this as what we have current. Accountants actually call it the Current Account, or Working Capital.
There are also longer term items in the photo, like our furniture, perhaps our office, and money we borrowed from the bank on longer terms like a mortgage. These are what we call non current.
So now imagine we come back 6 months later, and we take another photo. Then we sit down to compare the two. The computers may be the same but stock will probably be different, and if we could photograph the bank balance it too would have changed.
As accountants we often measure the differences between these two photographs. From these differences we can tell how quickly you sell your stock, how long your customers take to pay you, and whether the business is improving overall.
As small business owners ourselves we know what you focus on! Everyday you know how much cash you have in the bank, or perhaps how close you are to your overdraft limit. Most of you also know how much your customers owe you (note I use the word most!).
As your accountants we want you to get past this simplistic way of managing the financials. But we all know change happens slowly! So we have designed a set of reports which are very easy to produce from your MYOB file, and which focus on the cash/sales/debtors cycle but let you dig deeper into this area with very little effort.
These are the graphs.
When you receive your next BAS report, have a look at them. Talk to us about what they really mean for your business and what, if anything, needs to change.
This article is the first of a series which will aim to provide information vital to your business’ success - you may begin with little to no knowledge of Financials but our articles will lead you through areas we feel are important to your understanding of your business. If you would like to access later articles then search on the keyword “accounts”.
In the next article we will answer the question most asked - “where did my cash go, I know I made a profit, but there is nothing in the bank!” But if you can’t wait, call our office on 02 9299 7044 for the answer.