Making Sense of Company Financial Statements

That time of year always comes. Larger companies across the UK must publish key annual financial statements that give a detailed picture of their growth prospects. Whenever profit & loss (P&L) accounts and balance sheets are mentioned, several paragraphs of jargon usually follow. This jargon is about as helpful to entrepreneurs as a surprise bill.

Let’s cut through the paperwork and get to the point of these financial statements.

But what about your own accounts?

Profit and loss accounts detail your company’s revenues and costs, and can be prepared on an annual, quarterly or even, monthly basis. You can see how much you’re having to spend to get one pound back in revenue. As well as simply showing ongoing profits and losses, these accounts can allow you, for example, to pinpoint unnecessary expenses and slower months.

This data can give you a clear picture of exactly how to increase your profitability as quickly as possible. You can then make sure that every key cost incurred by your business is accounted for. Otherwise, it’s so easy for expenses to go under the radar – something more important is always landing on your desk.

The information gleaned from an analysis of your P&L can show you which customers, products or services are adding significant value to your business, and which expenses need greater control. Without this analysis, businesses would never be able to get a grip of their operations.

 P&L accounts allow you to turn disappointing margins and wasted expenditure into seized opportunities.

How are balance sheets difficult?

Balance sheets don’t cover day-to-day spending. They focus on assets and liabilities at a point in time, exploring whether your business owns more than it owes, in other words, its worth. If you paid off all your debts in one go, and then sold all your assets, how much would you have left?

Without this analysis, it’s impossible to know how much your business can afford to borrow. Also, what would you do if your creditors demanded more stringent terms just as your debtors were taking longer to pay? How would you ensure your company’s survival?

Balance sheets are unique because they present snapshots of companies’ financial positions. They aren’t about ‘the year in review’. They’re all about the here and now. Balance sheets show you exactly when debt becomes unsustainable. Once you have this information, you can take appropriate action to attempt to balance your books.

Where do cash flow statements fit in?

Changes in balances sheets reflect changes in a company’s cash position. For example, more liabilities ultimately will mean less money in the bank. Cash flow statements play a crucial role in assessing and maintaining a company’s viability. They get behind profits and losses to demonstrate where the cash is coming from and going to. They can also help you to spot ‘bumps in the road’ in enough time for you to smooth those bumps in good time.

It’s a harsh learning curve that large customer orders won’t stop you running out of cash, unless you manage your cash flow carefully.