It’s the end the of the financial year and for small businesses that means getting your affairs in order and buying things if you need them so you can claim the business expense this financial year.
Public companies that are listed on the ASX and other stock exchanges around the world report quarterly or half yearly and if you are a business owner or a share investor it’s important to understand how to read financial reports.
An interesting and relevant example is how Xero recently announced a big loss in their recent financial report but their share price sky-rocketed.
We mentioned that Jerry should use his accounting software to determine whether his he’ll have the start-up capital required to fund his new venture for the next 12 months. The best way to do this is to create a cash flow forecast, and we’re going to show you how.
Cash flow is a better indicator of available funds
If you’re wondering why you wouldn’t create a profit forecast, it’s pretty simple. Cash flow represents money in the bank, after you’ve paid all your suppliers and staff and loan repayments and so forth, while profit just shows how much the business earned but doesn’t take into account any cash outlays.
Profit just shows how much the business earned but doesn’t take into account any cash outlays.
It’s important to understand that it’s not uncommon for businesses to be profitable; however due to cash outlays, these same businesses may not actually have enough money in the bank to fund investment, or in this case, a new venture.
Generating a cash flow report in Xero
Follow these steps in Xero to generate a cash flow report for your business:
Go to Reports, then click All Reports.
Under Financial, select Cash Summary.
Enter the following report settings:
Date — The latest finalised month
Period — 1 month
Compare With — Previous 11 Periods
Select the Include GST and Show YTD filters
Click Update to generate the report in Xero
At the bottom of the report, click Export and select Excel to download the report in Microsoft Excel format.
The messy startup needs Xero Cashflow Training
There is a great business case study with lots of practical exercises in the Xero Cashflow Training Course. You’ll learn how to code and manage lots of different types of transactions and reconcile 2 quarters worth of transactions and end up producing cash flow reports to make financial sense of it all.
You’ll even be able to highlight alternative ways of financing some of those transactions.
Set up formulas to forecast 12 months ahead
In Excel, you’ll need to create formulas that will show you the average cashflow of your business across the previous 12 month period, so you can then forecast ahead for the next 12 months.
If you don’t use Xero and you’re using MYOB or QuickBooks, our MYOB and QuickBooks training courses will also show you how to run cashflow reports, among many others.
Profit and loss statements should be run by businesses regularly and are required by law.
A basic, yet vitally important, report for every business owner is a profit and loss (P&L) statement. A profit and loss statement, as the name suggests, shows whether a business is running at a profit or a loss over a given period. We’ve written about why running multi-period P&Ls before in QuickBooks and MYOB is a good idea for businesses with inventory, but single period P&Ls are equally important for all businesses.
If you’re a bookkeeping newbie, a profit and loss statement, which sometimes goes by other names — income statements, earning statements, revenue statements, operating statements, statement of operations, or statement of financial performance — is a basic report you’ll learn to run in our Xero Daily Reconciliations Course. If you’re planning to work as a contract bookkeeper, you should get in the habit of running P&L statements for your clients regularly (if you’re a business owner, ask your bookkeeper to run them).
P&Ls are required by law
Depending on how a business is structured, it may be required by law to complete a P&L. A P&L shows how the revenue of the business is turned into net income by subtracting all expenses from income. They’re also useful for understanding a business’ net income, which helps with the decision making processes. A business will also need a P&L if they’re applying for a small business loan.
The contents of a P&L
Although the process of running a P&L differ between accounting software packages, they usually all contain the same elements, depending only on the business itself. In the first section, the cost of sales is subtracted from the revenue, which highlights gross profit. The business’ operating expenses are then subtracted from the gross profit, which leaves the operating profit. Now, all of the non-operating revenues and expenses must be factored into account, after which the business’ profit or loss will be displayed.
***
Because P&L statements are often used by a business’ owner to make financial decisions, to inform shareholders of the business’ performance, apply for a business loan, or as proof of income in the sale of a business, it’s important that you understand how to create one correctly. Our Xero Daily Reconciliations Training Course covers P&L statements, and much more. Visit our website to learn more or to enrol.
Type the first 3 characters to discover courses, up-skilling programs and CPD articles.
EzyLearn's Career Academy
Enrolled into an EzyLearn course since 2013? Get access to new & updated course content and support by joining the EzyLearn Course Refresher Access membership Program. See how to extend your course life & support.
Xero is a great bookkeeping program for tradies who are on the go and using their phones (or a tablet) all the time. From receipts scanning to creating quotes and invoices, receiving payments and keeping track of project costs.
bookkeepercourse.com.au/produ…
Although the process of running a P&L differ between accounting software packages, they usually all contain the same elements, depending only on the business itself. In the first section, the cost of sales is subtracted from the revenue, which highlights gross profit. The business’ operating expenses are then subtracted from the gross profit, which leaves the operating profit. Now, all of the non-operating revenues and expenses must be factored into account, after which the business’ profit or loss will be displayed. 
