Have you found that financial statements can be a little confusing?
Well you’re not alone because many business owners have great difficulty in understanding their numbers and for many they look like ants walking up a page!
The beautiful thing is that when you understand your financial numbers they can become a very powerful management tool for your business and of course all of us want to know ‘Where the Money’s Gone?’ in our businesses.
So before you rush into trying to create your own financial statement template let’s go through the basics of what you’ll need.
The first is to realise that financial statements are made up of three different statements which all connect together:
- Profit and Loss Account
- Balance Sheet
- Cash Flow
Most business owners think they understand their profit and loss account without realising that it is simply a regurgitation of the customer invoices, supplier invoices and employee wage payments summarised into a single statement.
If the timing of this is not carefully monitored then income and expenses will not be matched correctly and the profit and loss account is worth no more than a ‘bunch of wet tram tickets.
So making sure you have the correct timing in your profit and loss account is critical in ensuring your financial statement template means something.
The next section to consider is the balance sheet which is an area where many business owners’ eyes glaze over because they never read a balance sheet and it doesn’t relate to their real life. Like it or not, we live in a world dominated by debt and many business owners have borrowed against their home to get into business.
People now think differently as a result of living with debt over long periods. You don’t save up to buy capital items any longer.
At best you get a deposit and borrow the rest to buy capital items. So constructing a balance sheet format that takes this into account will help you understand the balance sheet better.
Don’t use
Assets minus Liabilities EQUALS Equity for your balance sheet!
Use
Working Capital + Fixed Capital EQUALS Debt + Equity and it will relate better to your personal life.
Once you have your balance sheet in the correct format you can make sure it connects to your profit and loss account by using the following equation:
Opening Equity (Balance Sheet) PLUS Profit (Profit and Loss Account) EQUALS Closing Equity (Balance Sheet)
This will ensure both of your statements tie together.
The last of the statements is the Cash Flow and this is a very difficult task for many business owners because they start with their bank statement and never know how to tie that back to their Profit and Loss Account and Balance Sheet.
While in a single dimensional way they understand their cash, it doesn’t help them in the overall strategic management of their business.
The first place you must go to bring this together is the Bank Reconciliation in your accounting books.
If this is not filled out correctly then your books might show something completely different to the Bank and you’re in real trouble.
Once the reconciliation is correct and up to date, you can balance your cash flow to the bank account in your BOOKS and then you tie your Profit and Loss Account, Balance Sheet and Cash Flow statements together in a simple financial statement template.
This is often known as a three way forecast and provides a very powerful forecasting tool for the big picture overview of the financial health of your business.
What have you done in the past to prepare a financial statement template in your business?
