Where is your money going?

Understanding the financial situation of your business can be a pretty intimidating task, accountants often speak in a foreign language and struggle to bring complex reports regarding your money down to a level which you can understand. Without the knowledge of where your business stands financially it is impossible for you to make good decisions regarding how you are going to make it better and more profitable.

The three most important reports you need for your business is a profit and loss report, a balance sheet report and a cash plan.

The profit and loss report, which can also be known as a statement of financial performance shows the profitability(hopefully) of your business over a period of time, usually a month or a year. Simply, this report shows you the dollar value of the “sales” you have made less the” cost of goods” which you had to buy to make these sales. For a clothing store this would be the wholesale cost of the clothes they buy to then on sell in their store. The “cost of labour” is then subtracted, this is all those people working for you that help make those sales. Finally all of your “general expenses” such as electricity and rent are subtracted and you end up with your profit for the month. This is pre any interest or tax payments and any depreciation on any of the things you own. As with all financial reports a profit and loss report is only as accurate as the information that you have going into it, you must have every invoice for the period you are looking at, no matter how small you won’t have a true indication of how your business is performing until every invoice has been entered.

The Balance sheet or statement of financial performance shows you the health and the value of your business. It tells what you own and what you owe. It identifies assets, which are the things your business owns such as cash, equipment, material, buildings, money owed to you etc etc. Liabilities, which are debts and money you owe to others, things like accounts you still have to pay, tax, payroll etc etc, and equity which is what’s left for you the owner and after liabilities are subtracted from assets.

Why do you need both?
Picture two businesses, both businesses do the same amount of sales and both have exactly the same expenses. They spend the same amount on labour, they have identical electricity bills, and both payoff their credit cards every month. In other words, their profit and loss reports are identical. However one business owns the building in which it operates (an asset on its balance sheet), whereas the other business rents. Obviously the business with the equity in the building is a bit stronger financially? The financial picture of each business is much clearer with both statements providing information.


Finally you need your cash plan so you can manage your business on a day to day basis effectively. There are all types of cash plans, they all work on the premise that cash is king and that when you know what days you have money coming in and what days you have money going out you can ensure that you never get caught short. A good cash plan extends out twelve months in advance to give you the best help in making decisions. Imagine a restaurant who plans on adding a courtyard in six months time, by entering the estimated cost into their cash plan in the month they plan on making the addition they can see whether they will have enough money or whether they might need an overdraft facility for a period of time from the bank. The bank far prefers to be asked six months in advance rather than two days before when you realise you are going to be short.

There is work involved in getting these reports up and running however once they are a part of your businesses process they are very easy to manage. Once you have these reports produced regularly, areas where you can reduce costs and increase sales will begin to emerge and the opportunity to increase the profits of your business will never have been greater.

visit www.e-myth.com for great resources on financial statements
visit www.xero.com for a great easy to use online accounting package

TESTING PARTNERS

Goodbars based in Queenstown has signed on as a testing partner with Loaded currently connected to six of their Queenstown outlets.

www.goodbars.co.nz

Elevate bar in Christchurch has now been testing Loaded for the past three months, the feedback has been outstanding with owner James O'connell loving the ability to monitor his business performance from anywhere.

www.elevatebar.co.nz

Loaded is currently holding several other meeting with possible testing partners to ensure the product is spot on before going to market.