The Balance Sheet and Profit and Loss Statement: A Business Owner’s Guide
You can’t manage what you can’t measure.
— Peter Drucker
in order to manage and improve and grow your business, you need to have some measure of where it is at any one time. That’s why you should be preparing regular reports to help you manage your business (often know as management accounts). The most common reports in management accounts are a Balance Sheet and a Profit and Loss statement (“P&L”).
Your Balance Sheet summarises what you own and what you owe and lets you know what your company’s position is at a given point in time (usually, at a month or quarter end). Your P&L summarises the sales, costs and expenses of your business over a period of time, usually the month of the quarter. So, you can think of the Balance Sheet as the where you ended up, and the P&L as the how you got there.
Your Balance Sheet should have a similar layout each time you report it, so that you can easily compare the change in position over time. Usually, you will see:
- Long term assets eg property, fixed assets
- Short term, fast moving assets eg cash and inventory
- Short term liablities eg bills you have to pay
- Longer term liablities such as formal loans
- Net asset position, being your assets less your liabilities.
The P&L should also have a consistent format. Usually you’ll see:
- Sales, AKA ‘the top line’
- Direct costs of doing business eg materials and delivery
- Other operating expenses; people and property are usually the big costs
- Net profit before taxes (sales less costs)
- Taxes due on the profit of the business
- Net profit after taxes or ‘the bottom line’.
If you don’t have any accounting software which can help you to produce these, you can find many templates for creating these reports online for free like this one for example.
What to look out for
Firstly, make sure that your reports have data that you can compare the current position or period to. These ‘comparatives’ should be in a similar format, and ideally in a separate column next to the current period’s data. You might like to compare month on month or, if you have a very seasonal business, with the same period last year. Whatever you chose, make it meaningful.
Then, look at how things have moved. Some example questions are:
- Are sales up or down? How does that compare to the effort you and your team are putting in? What can you change?
- How are other costs changing over time? Do you understand each of the costs in your business? Could there be any missing?
- How much cash is in the bank? How much has that changed since the last report? How many months of bills will that cover? Is it time to look at investing any ‘spare’ cash?
- What’s making up your Accounts Receivable (that’s your unpaid sales invoices)? Are there any old ones in there? How can you follow up?
As well as looking at what’s in front of you, ask yourself:
- Does your business have all the information it needs to make key management decisions?
- Does that information arrive at the right time, providing the details that you need to run the business?
Getting into a routine
It’s key to make this a regular routine. Calendars and deadlines are key here, no matter the size of your organization.
Start with the end in mind. Work out how frequently you want to review your management accounts (and whilst that might be quarterly initially, I believe that you should always work towards a monthly pattern to make sure that the measurements of your business are timely and useful).
Then, understand what needs to happen after the period ends to produce those accounts.
- What paperwork or data entry needs to be taken care of?
- Are there any period end journals to post?
Identify each job that needs to be done, give them an owner and set a deadline. Tip: Defining them as a number of business days after the period end will mean the same deadlines can be reused each reporting period.
If you have a team involved in the preparation of the reports, make sure they know you’re taking them seriously. Feedback on things you find or don’t understand in the reports and ask them to get back to you. It will help them to see the value of their work and take more of an interest in the wider business.
How The Finance Team can help
So, there you go! How close are you to having accurate, timely management accounts? And what are you doing with them once you have them?
At The Finance Team, we’ve seen it all – and supported business to get prompt reporting with the insights they need. We’re on hand to help. Book a free 30 minute consultation, and we’ll work together to build two or three ideas to get you closer to measuring and managing your business.
What are you waiting for?