Business accounting – another language
Over the years, I have come across loads business owners who run their business and that’s where it ends. They rarely (if ever) glance at their financial statements. Also called financials or reports – it has many names that all mean the same. You know what they are – those things you do for SARS, or possibly the bank manager, and come with a fairly large invoice attached.
Just the other day, I glanced at the prospective client’s financials and asked about the fact that they had a reported loss of over a R 100k for the prior financial year. The client was so surprised at this news; they went into mild pain and shock resulted, in fact for a number of days thereafter. She claimed that no one had told her this news, even though the reports were in her possession for a number of months.
Which period?
The term financials has been thrown around a lot. Which period are we talking about? In reality, “financials” can be for any period from Monthly to annual financial statements. The AFS comprise of the most information in a comprehensive format, which, a lot of the time, is confusing for many people. Other reports can be made up of any report that the company require, these also fall under the umbrella of “financials”. For the purpose of this article, we are referring to the AFS.
The Annual Financial Statements consist of (and their basic function):
- Statement of Financial Position (old Balance Sheet)
- Income Statement:
- Cash Flow Statement:
- Change in equity Statement
- Notes to the Financial Statements
- Directors / owner’s report
Good news!
The good news is that you don’t need to wait for your annual financial statements to make the above type of decisions – you can ask your accountant to provide this information on a quarterly, or even monthly, basis – this will give you more than enough time to identify issues as they begin to surface, and to implement corrective actions.
Reporting is critical to business accounting being used PROPERLY and your business success, please contact us for more information or for a simple explanation you may require. More about the accounting services we provide can be read here.
Here are some other articles on this topic:
Reports: What’s the point?
Accounting records: 4 ways to get control of your accounting paperwork
Cost of sales.
A cost of sales (COS) is an expense you incurred in order to make a sale.
COS and expenses are often used with the same meaning but are vastly different in the function they serve. As stated above, a COS is cost to your business that you had to spend in order to get that sale.
Cost of sales can vary greatly from month to month as sales go up or down. They can be in proportion to the sales for a particular period. Therefore, if you make sales – you will have cost of sales. If you do not make sales, you will not (or have a minimal amount).
Read more about cost of sales here
Reports: The Income Statement
The income statement is a vital report that is the start of all business accounting reporting. Every business owner should use and understand this report.
What are they?
An income statement is, at the basic building blocks, a list of all income and expenses for an entity for a given period.
Why use it?
This report has many metrics for an entity to look at:
- All the totals eg: sales, expenses etc
- Gross profit
- Nett profit / Loss
- Comparative figures
Budgets
I know what you are thinking – I hate numbers and I hate budgeting even more! The truth is that it is vital that you get the budget as accurate as possible so you know where to focus on and how to get to where you are going.
What do I need?
- Last years ‘numbers
- A pen and paper (old school I know) – if you want a spreadsheet preferably with last year numbers in already.
- Peace and quiet. No distractions
- Your accountant on speed dial.
So here are the factors to accurate budgeting.
- Costs
- Direct costs
- Other costs:
- Increases
- Realistic expectations
- Ask for help
- Play with the numbers
Although numbers may not be your strong point, your business requires you to direct it in the right direction. An accurate budget is key to this.
Here are a few more articles on budgeting, you may also want to contact us regarding your budgeting process