How often do you step back from the day-to-day operations to look at your business’s health and financial performance? Some business owners do this every month, and some every quarter. Many are too busy to do this and suffer from the disadvantage.
A good Chief Financial Officer (CFO) provides reports with a holistic view of a business’s health. These can provide significant growth opportunities for investors and creditors as well.
As a business owner, what vital financial reports should you look at? And what insights should each of the reports be showing you?
Typically, the CFO’s role is to complete and review each financial report to provide strategic advice to the business owner. Each statement looks at a particular aspect of the business. The CFO would then combine them to share a current business performance overview.
The 4 Most Common Financial Reports.
1. Balance Sheet
A balance sheet is a financial statement that provides a snapshot of a company’s financial position and shows what the company owns, owes, and has invested in the business. This can also deliver the current value of a business for the period it covers.
The balance sheet outlines the following items:
- Liquid assets – cash, certificates of deposit, short-term securities and treasury bills.
- Current assets – accounts receivable, inventory, fixed assets and prepaid expenses.
- Current liabilities – short-term and long-term debt, accounts payable, payable wages and dividends, tax expenses and prepayments from clients.
- Shareholder and owner equity values – retained income, receivable dividends, capital gains and stocks.
The balance sheet is essential because it shows whether a company has enough assets to cover its liabilities, a key indicator of financial stability.
2. Income Statement
An income statement, or a profit and loss (P & L) statement, is the most important financial report because it shows whether a company is making a profit or a loss. It provides insights into how much revenue is generated, the cost of goods sold, and the expenses incurred to run the business.
There are several critical elements in this document:
- Operating revenue which accounts for selling products or services.
- Net and gross revenues, including total sales revenue and remaining revenue after subtracting costs.
- Nonoperating income from accrued interest, investment returns, royalty payments, and capital gains.
- Direct expenses include the cost of goods sold (COGS), depreciation and selling, and general and administrative costs (SG&A).
- Secondary expenses, like debt or loan interest, asset loss and capital loss.
3. Cash Flow Statement
A cash flow statement (CFS) shows a company’s cash inflows and outflows over a specific period. The CFS is critical because it shows how much cash a company has to pay its bills and invest in the business.
A positive cash flow indicates that a company generates more cash than it spends. In contrast, a negative cash flow shows that a company pays more than it generates.
The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight into whether a company is financially stable. A business could display a profit in the Income Statement but have a negative cash flow.
The cash flow statement typically comprises three key elements:
- Operational activities – accounts receivable and payable, inventories, wages, income tax and cash receipts.
- Investment activities – the generation and use of investment earnings, asset sales, issued loans or credit and payments from acquisitions or mergers.
- Financing activities – stock repurchases, payable dividends, debt repayments and issuance, cash from investors and cash payments to shareholders.
4. Statement of Changes in Equity
A statement of changes in equity shows a company’s changes in equity over a specific period. This report shows how much money has been invested in the business and how profit has been retained. Retained earnings are often used to pay off the company’s debt obligations. It also shows dividends paid to shareholders and changes in share capital.
Notes to the Financial Statements
Notes to the financial statements provide additional information about a company’s financial position and performance. The notes explain the accounting policies used to prepare the financial statements, give details on significant transactions, and disclose any contingencies or risks. The letters are important because they provide additional context and transparency to the financial statements.
Why Are Financial Reports Important?
Financial reports are essential because they provide insight into a company’s financial position and performance. They help business owners make informed decisions about allocating resources and planning for the future. Here are some reasons why a CFO would produce financial reports:
👉 Measure performance
Financial reports provide a benchmark for measuring a company’s performance over time. By comparing financial statements from different periods, business owners can identify trends and areas of improvement.
👉 Facilitate decision making
Financial reports provide insights into a company’s financial health, which can inform business decisions. For example, if a company generates much revenue but has high expenses, the business owner may reduce expenses to improve profitability.
👉 Evaluate financial stability
Financial reports show a company’s financial stability by providing information about assets, liabilities, and equity.
👉 Comply with regulations
By preparing financial reports, businesses can ensure they are meeting their regulatory obligations.
Utilising Different Financial Reports
Financial reports are an essential tool for financial management in Australian businesses. They provide a snapshot of a company’s financial health and inform decision-making.
If you’re a business owner with any uncertainty about your business performance and don’t have a full-time CFO to assist, our Virtual CFO services may help. By outsourcing your CFO function, you can save money and only get the services you need for informed decision-making.
The part-time basis allows the CFO function to expand along with your business growth. Virtual CFOs provide in-depth knowledge and skills that can grow your business with multi-industry exposure.
Not only can we provide you with financial reports, but Virtual CFOs can also assist in strategic financial management.
Reach out to us at email@example.com or call (02) 7804 1849.