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Understanding Financial Reports

Understanding your financial reports can be such a daunting task. It doesn't have to be scary anymore.

What are the most important reports to review as a business owner?

There are three reports that I highly suggest reviewing regularly as a business owner. The Profit and Loss, Balance Sheet, and Cash Flows Statement. These three reports are the most important because they show you all about your business.

Why are Profit and Loss important?

Profit and Loss are important because it reports your income and your expenses. Keep in mind, this is also the most important report you need to complete your taxes, no matter your business. You need a Profit and Loss, even if you don't realize it, the schedule C is basically a Profit and Loss. So keep that in mind when you're reviewing your Profit and Loss. The first part of your Profit and Loss is the income. Then you will list a breakdown of all your business deductions. Keep in mind, when you pay yourself from your business, it should be reflected as Owner's Equity and it doesn't show up on the Profit and Loss. It is only reflected on the balance sheet. I often get asked why it doesn't show up on your Profit and Loss. The reason is, it is not a taxable expense. It is your income that you paid yourself and it is taxable income.

Common Expenses listed on the Profit and Loss:

· Advertising

· Business Insurance

· Commissions and Fees

· Contract Labor

· Depreciation of Assets

· Job Supplies

· Mortgage of Office, Storage, or Manufacturing Center

· Office Supplies

· Legal and Professional Services

· Rent or Lease of Office

· Rent of Lease of Vehicles

· Repairs and Maintenance

· Business Taxes (not personal income taxes) and Business Licenses

· Business Travel

· Business Office, or Manufacturing Center Utilities (not personal home office utilities)

· Business Vehicle Expenses (not a vehicle used for both personal and business)

· Corporate Rent for those who are incorporated and work from home

Note: On the Profit and Loss you don't list your business office utilities and rent if you are using your own home. Do you use your own car for business travel? Make sure to keep track of your business miles. The mileage and maintenance on your personal vehicle are not listed on your Profit and Loss because it is a personal expense that is written off only on taxes at the mileage rate that is given yearly by the IRS. These are only added to your taxes but not to your bookkeeping.

What to look for when reviewing your Profit and Loss?

When reviewing your Profit and Loss, especially watch for negative numbers or accounts that seem too high or too low. Best if you can review your Profit and Loss Detail report. Make sure that if you do find changes that need to be made, make them. If your using QuickBooks Online here is a tip: go to the reports and look up the Profit and Loss Detail. Then review each line item. If there is a change that needs to be made, click right there on the line item and make the change.

What is a balance sheet?

Think of it as a scale that needs to balance. The assets must equal the Liabilities and Equity. Your balance sheet lists your assets first. Your business assets include the business checking and savings accounts. It also includes inventory on hand, equipment, computers, buildings, etc. The rule of thumb is if you purchase something that is over $500, most likely it will need to be listed as an asset and depreciated over the lifetime of the asset. Liabilities are what you owe to someone else. Make sure you list your business credit cards and loans as liabilities. Equity is listed last. This is where your payments to yourself get listed. Many think it should be on the Profit and Loss but it doesn't show up there. It shows up on the Balance Sheet under Owner's Equity. Make sure you're paying yourself through this account. Note: Any payroll payments are different from just transfers from your business account to your personal account, you actually have a w2 for yourself in business and are paying yourself through payroll software, do get listed on the Profit and Loss.

What to look for when reviewing the Balance Sheet?

When reviewing your Balance Sheet, make sure all assets and Liabilities are listed correctly. Watch for negative numbers. Make sure your equity for the year is accurate! It is important that you update all assets and liabilities with the current balance. Your assets and liabilities balances should change throughout the year and it is very common for small business owners to only adjust them at the end of the year for taxes, so make sure these are up to date.

What is a Statement of Cash Flows?

Some businesses like to look at the Statement of Cash Flows. Basically, the Statement of Cash Flows takes the important numbers from both the Profit and Loss and the Balance Sheet and combines the two reports into one overview report. This report is very useful when looking at how much money the business has. If you only have time to look at the Profit and Loss and Balance sheet, those are the two most important reports to review regularly.

Need some help understanding what a Profit and Loss look like? I made this free Profit and Loss Template just for you! This will help you understand what accounts are on the Profit and Loss and how it works. Download yours today!

I would love to talk to an accountant! I am lost!

I am here to help you! I offer free 15-minute consultations to decide what bookkeeping options are best for you. I can help guide you to do it yourself or I can hold your hand the whole way. I offer DIY bookkeeping courses, setup, and get-you-caught-up services, and monthly bookkeeping services. If you need a tax accountant, I have a great referral for you! Whatever your need is, I can guide you in the right direction.

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