A carpenter cannot do his job without knowing how to use the tools of his trade like a hammer or a saw
A small business owner cannot do his job without knowing how to use the tools of running a business, like understanding the Financial Statements of his business.
What is a Financial Statement?
A financial statement is a structured record that shows what your business owns, owes, earns, and spends. Think of it as a health check-up for your business—written in numbers.
In Australia, financial statements are prepared in line with Australian Accounting Standards. For small businesses, these aren’t just compliance documents; they’re decision-making tools that give you a clear view of your business performance and financial health.
Where to Start When Reading Financial Statements
If you’re not used to reading financials, start with the big picture before diving into the detail.
- Profit & Loss Statement: Shows your business’s revenue, expenses, and whether you made a profit or loss over a period.
- Cash Flow Statement: Tracks the actual money coming in and out of your business.
- Balance Sheet: A snapshot of what your business owns and owes at a given point in time.
Together, these reports tell you how your business is performing, where the risks are, and what changes may be needed to keep it moving forward.
Understanding the Profit & Loss Statement
Your Profit & Loss (P&L) statement shows the income your business has generated, the costs it has incurred, and the resulting profit.
Key terms to know:
- Revenue (Sales): Your total earnings before costs.
- Net Profit After Tax (NPAT): What’s left after all expenses and tax—your bottom line.
- EBIT (Earnings Before Interest and Tax): Profitability from your core operations before financing costs and tax.
Reviewing your P&L regularly helps you spot whether your business model is working and where costs or margins need attention.
Understanding the Balance Sheet
The Balance Sheet (also called the Statement of Financial Position) shows what your business owns and owes.
- Current assets and liabilities: Items due within 12 months. Healthy businesses should have enough current assets to cover short-term debts.
- Equity: Assets minus liabilities. This shows your stake in the business. If liabilities outweigh assets, that’s a warning sign.
Cash Flow vs Profit: Why They Differ
Profit doesn’t always mean cash in the bank. Revenue and expenses are recorded when they occur, not when money actually changes hands.
For example, if you record strong sales in June but customers don’t pay until August, your profit looks good—but your cash flow may be struggling.
That’s why the Cash Flow Statement is essential. It shows whether your business is converting profit into real money you can use to pay bills, staff, and yourself.
Positive Signs in Your Financial Statements
When reviewing your reports, you want to see:
- Steady growth in revenue and profit
- Expenses under control
- More assets than liabilities
- Positive operating cash flow
Red Flags to Watch Out For
Warning signs that need your attention include:
- Falling revenue or ongoing losses
- One-off sales or asset disposals propping up results
- Current liabilities higher than current assets
- Regular cash flow shortages
Why Small Business Owners Must Read Their Financials
As a director of your business, you can’t afford to ignore the numbers. Understanding your Profit & Loss Statement, Balance Sheet, and Cash Flow equips you to make better decisions, avoid risks, and keep your business on track.
Even if you have a bookkeeper or accountant, it’s vital that you’re across the basics. These reports aren’t just for compliance—they’re for you, the owner, to steer your business confidently.
About Chan & Naylor
Since 1990, Chan & Naylor has partnered with business owners and property investors in managing their taxes and building a tax-effective wealth. Choosing Chan & Naylor means you’re not just selecting a service provider; you’re gaining a partner aligned with your financial goals. You’ll have access to a dedicated client manager supported by a team of accountants that specialises in business and property tax.
Disclaimer
This article serves as general information only and may not account for the unique circumstances of individual readers. For personalised and strategic solutions tailored to your specific situation, we invite you to seek professional advice from Chan & Naylor. Our highly experienced team is dedicated to helping you navigate the complexities of Australian taxation, ensuring that your financial strategies align with the latest regulations. Contact us today to embark on a path of informed and customised tax planning for your property investments.
