Does your financial reporting deliver real meaning?
Financial reporting provides insight and transparency into your company’s financial position and operations. It’s important because it gives company stakeholders the right information, with the right amount of detail, to make better-informed decisions.
There are three primary components of your financial statements – the income statement, the balance sheet, and your cash flow statement. Together, they present you with a complete picture of the financial condition and results of your business.
Financial statement reports
- Your income statement reveals whether or not you’re making a profit for the period.
- Your balance sheet doesn’t reveal operational results but, when paired with your income statement and an easy-to-interpret balance sheet, shows the amount of investment needed to support sales and profits shown in your income statement.
- Your cash flow statement shows the money coming into and leaving your business.
The benefits of your budget
However, in addition to these reports, a good measurement tool to focus on to get the most meaning from your financial reporting is your profit and loss statement, which should be compared to your budget and balance sheet.
For your budget to be as accurate as possible, you need to understand your market and seasonal income fluctuations. Your expenses should be based on facts, such as when insurance premiums increase. Your budget must reflect these changes to measure real performance.
Then, by measuring your actual results against your budgeted values, you’ll have a tool to determine variances. Since your budget is created to act as a guide for your business to accomplish its goals and objectives, it’s important to periodically measure how well the business was able to stick to it. Have you exceeded expectations or come up short?
Gross profit percentage and net profit margin
You’ll also achieve significant insights into your business’s performance by considering your gross profit percentage and your net profit margin. These amounts are interdependent – your net profit reflects the amount of money you have left after paying all your business expenses, while your gross profit is the amount you have left after deducting the cost of sales from your revenue. Your gross profit will increase or decrease according to the volume of products or services sold.