Do I Need to Look at Financial Reports for My Business?

It’s easy to get caught up in the day-to-day hustle of running your own business. In amongst all the excitement and anxiety, it’s particularly easy to overlook your financial reports. Which is a massive shame, because they’re incredibly useful.

Whether you’re a brand-new startup or more established, regularly reviewing your financial reports (and actually understanding them) is key to keeping your business healthy and growing. In this article we explain what reports to look at, and how to make sense of them.

Why do financial reports matter?

Financial reports matter because they give you a clear picture of your business’s financial health. This can help you make smarter decisions and plan for the future.

For example, your financial reporting will show whether you’re making a profit, or lots of sales. It’s a key difference because lots of money coming in doesn’t necessarily mean healthy finances if your costs are very high.

Your financial reports will also help you review your cash flow so you can make more accurate predictions about how much you’ll need available, and when.

Whether you’re thinking about cutting costs, moving premises, taking on more staff or simply keeping an eye on things, financial reports give the insights you need to manage your business confidently.

They’re also jolly useful if you need to complete a tax return, or to explain your current status and potential for future growth to investors or lenders. You can even use them to make sure you’ve balanced the books.

What are the different types of financial reports?

Let’s break down the key types of financial reports business owners should know about. The diagram below shows the relationship between different types of financial information in your business.

Profit and loss statement (P&L)

This is the most well-known financial report and a must for any business. Your profit and loss report shows how much money your business has made (revenue) and spent (expenses) over a specific timeframe.

It also shows whether your business is making money (a profit!) and where your biggest expenses are. For instance, you may realise a product line isn’t as profitable as you thought, or your operating costs are a bit too high. It’s useful information to have when it comes to making decisions.

Cash flow statement

As the saying goes, cash is king – and for a good reason. A cash flow statement shows how money moves in and out of your business. It highlights how well your business generates cash to pay its debts and expenses, and to reinvest in its growth. Businesses can quickly fail if they run out of cash, so understanding your cash flow is crucial in staying afloat.

Do you find yourself phoning suppliers to say you’ll need to pay them next week instead, because you’re waiting for a client to pay you? That’s a cash flow issue right there.

Balance sheet

A balance sheet offers a snapshot of your business’s financial health at a particular moment in time. It shows your assets (what you own), liabilities (what you owe), and the equity.

It gives an insight into the overall strength of your business, especially if you’re looking to attract investors or apply for a loan. Lenders often ask for a balance sheet so they can assess whether your business is strong enough to handle extra debt.

Budget versus actual

This report compares your budgeted figures to what actually happened. It’s a great way to see how well your financial forecasts matched up with reality. If any discrepancies are significant, you might want to rework your budgeting process or tackle unexpected challenges. Or have a word with your crystal ball.

Why financial reports are so useful

There are several reasons why regularly reviewing your financial reports is so important. We’ll explain them below because otherwise that statement is a bit useless.

Understanding the health of your business

Financial reports provide a clear picture of your business’s financial health. You’ll soon see if your business is actually making a profit or just a lot of sales. They’ll show where your money is going and whether your assets (what you own) outweigh your liabilities (what you owe).

Regularly reviewing these reports helps you identify issues early – before they become bigger problems. For example, if your profit and loss report shows profits have dropped for some reason, you can investigate and sort things out before your business starts to struggle.

Making informed decisions

Financial reports give you the data you need to make sound business decisions. Thinking of expanding or buying new equipment? Your financial reports will tell you if your business can afford it. For instance, if your cash flow statement shows a healthy balance, you might decide to move forward with your plans. But if it shows cash is tight, you might want to go for other funding options or postpone things for a while.

Securing funding

If you’re looking for a loan, investment, or even to lease a new office, financial reports are important in making it happen. Banks and investors need to see your financials so they can understand how risky (or not) your business is.

Well-maintained financial reports can boost your chances of securing financing by showing your business is profitable and stable.

There’s also a good chance they’ll ask to see a business plan as well, by the way. So have one of those up your sleeve too.

Preparing for taxes

Businesses must submit tax returns to HMRC each year. Your financial reports, especially the P&L and balance sheet, are crucial to this. That’s because they help make sure you report your income and expenses accurately, which not only keeps you out of trouble but also helps you to avoid underpaying or overpaying your taxes.

Tracking performance over time

Financial reports help you make comparisons with previous months or years. This helps you spot trends and assess whether your business is growing or if there are areas that could do with improvement.

For instance, if you notice your revenue is steadily increasing but your profits aren’t, it could be a sign your costs are going up too fast and you might need to make adjustments.

How often should I look through my financial reports?

It’s easy to think financial reports are something you look at once a year, but reviewing your financial reports every month helps you keep a closer eye on cash flow and profitability. If you’re facing a major business decision or seeing significant changes in your industry, you may want to look at your reports even more frequently.

Don’t forget, many online accounting systems (like Pandle!) can automatically generate financial reports for you, making it even easier to stay on top of things.

Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.