The language of financials
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.
Yes, another language
Everyone thinks that financials are written in some kind of foreign language BUT by learning some simple principals, the above scenario can be avoided. Even if just to identify differences from the norm, in order to ask your Accountant to explain things in more details.
AFS are another tool in the entrepreneurs’ arsenal in managing or running their business, and they should be used to make more sound financial decisions for the company. The AFS are prepared once a year, hence annual, but they can be broken down into more useful chunks. I recommend a monthly income statement – just one page to summarise they situation on a regular basis.
Accounting is not actually a foreign language but moreover a language that everyone should learn and be about 25% fluent in. 100% fluency in reserved for the more qualified of accountants etc. Accounting (and AFS) is actually simple. If it is complicated – you are doing something amiss. It can get technical but never complicated.
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): (overview of the business at a point in time eg:28 February 20XX)
- Income Statement: (overview of the business for a period eg: monthly, quarterly etc)
- Cash Flow Statement: (An overview of the flow of cash through the business from profits to cash, for a period)
- Change in equity Statement (as it says an overview of the changes in equities in the business)
- Notes to the Financial Statements (these are used for more clarification of certain figures in the above statements. An explanation of them.)
- Directors / owner’s report: Is exactly that – the report that the directors / owner present on the AFS
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.
Much of the accounting services we provide, is the education of clients about this “new language”. This helps you understand what you are looking at. This means that you can use the document to run your business. You will then see the benefit of paying for these statements. By using Financial Statements in this way, they become a working tool and an aid in decision making – and this is a great big step in the right direction.
Make AFS a working document, and not something grudgingly done for the authorities.
Reporting is critical to business success, please contact us for more information or for a simple explanation you may require. More about the accounting services we provide
Here are some other articles on this topic:
Reports: What’s the point?
Accounting records: 4 ways to get control of your accounting paperwork