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Your Financial Statements Explained.

 

Did you know that your Financial Statements tell a story about your business? You should know how to read them and the consequences for the main ratios that measure your Business health.

  1. Profit and Loss Statement

This determines the profit made by your business over a specified time frame. The principle of matching is used to ensure relevant sales and costs are taken to account for the specified time.

For example, if you pay rent 12 months in advance, the prepayment is not considered an expense relating to the specified time, and it is not taken up as an expense.

 

  1. Balance Sheet and Net Worth

Your Balance Sheet summarizes your assets and liabilities at a point in time. The excess of assets over liabilities is calculated as Total Assets minus Total Liabilities. This determines the Business Net Worth.

  • Current assets include bank account balances, accounts receivable, and other assets that are normally converted into cash within 12 mths; current liabilities are normally paid out within 12 months and include tax debts and accounts payable.
  • Non-current assets are held for the long term and include motor vehicles and plant & equipment; non-current liabilities are long-term liabilities that are not expected to be paid out within 12 months and include bank loans and hire purchase.

Net Worth is the calculation owner’s interest in the business.

  1. Solvency Score.
    A solvency score is often used by banks and investors to determine the future viability of a business. A number of different calculations are used by different institutions. Accountants 2 Business provides a complimentary Business Health Check report, and this contains a solvency score. It is provided to business clients annually where the client operates with a Company or Trust.

 

  1. Track your strengths

Compare your Balance Sheet over a number of periods, and determine if your net worth is increasing or not. A stronger Balance Sheet makes it easier to weather the storm of uncertain times in a tough economy. The Accountants 2 Business complimentary Business Health check tracks key Balance sheet and earnings figures over the prior three years.

 

  1. Important ratios.

Ratios like return on assets and debtors turnover can be tracked to develop a picture of the performance of the business over time—a Business  Health Check report from Accountants 2 Business tracks ten important ratios over 3 years.

For example, Debtor turnover might show that your customers pay on average every 25 days. But if your terms are 7 days, your debt collection processes are in desperate need of review.

You can also calculate the time it takes for your inventory to sell and compare that to prior years. Slow inventory turnover might indicate a need to review your inventory offering.

 

             6.Tax v Accounting.

Your Financial Statements should be prepared on an accounting basis using normal business principles. Your accountant should prepare a separate Tax Reconciliation to calculate taxable profit and tax on that profit.

For example, say your business makes a profit after your salary of $45,000. On 30th June, you purchase a Ute for $48,000, and this meets all the requirements for the instant asset write off. The Profit and Loss Statement should show depreciation of $22 and show profit after the purchase of the Ute of $ 44,978.

A separate Tax reconciliation statement contained in your financial statements should account for any items that are treated differently for tax purposes. This should show taxable profit as a $3,000 loss. So these Financial Statements will show a business profit of $ 44, 978, and taxable profit of $3,000 Loss.

Accountants 2 Business always prepare a Tax Reconciliation Statement as part of the Financial Statements. Be sure that your accountant prepares a Tax Reconciliation; not doing so is sure to scare your bank! Presenting your business inaccurately as under-performing.

 

Every business owner should review their Financial Statements and appreciate the story that they tell.

If you would like some help reading your Financial Statements, we can help. Book a meeting to discuss with one of our expert Business Accountants.

 

The information in this article is general in nature and might not be right for your circumstance. Please arrange a meeting with one of our Accountants to discuss your particular needs.