What if your financial statements are incorrect?

Here is some food for thought: if you were to grab your multimeter to test an HVAC system and power is reaching components (such as a thermostat, control board, condenser, and the blower motor), but it reads the correct voltage, it signals that everything is working.

However, you were called by the customer because it’s not functioning as an HVAC system should. Would you continue to use that multimeter or investigate further to determine what is causing the issue? No, because that’s not providing you with accurate readings, and you were called to fix an issue the customer relies on and pays you to complete. The same goes for financial statements in your business: you can’t successfully gauge which decisions are best for your goals if you don’t have accurate financial reports.

Wondering what financial report gibberish is?

The financial reports we primarily work with are Accounts Receivable, Accounts Payable, Profit & Loss, and the Balance Sheet. It’s imperative to review these monthly to help you identify trends, patterns, and outliers. Reviewing these reports also ensures you make any necessary bookkeeping corrections to ensure accuracy.

Accounts Receivable and Accounts Payable Reports

Let’s begin with the ancillary reports: Accounts Receivable and Accounts Payable. These are not the primary reports, but they do feed into the Profit & Loss and the Balance Sheet. The accounts receivable report lists customers who owe you money for goods or services you provided. It shows the invoice or job number, the amount due, and the days overdue.

The report breaks out days past due in these categories: Current, 1-30 days, 31-60 days, 61-90 days, and 90+ days. This report allows you to track incoming cash flow, identify slow-paying customers, and decide when to send reminders or initiate collections. Avoid allowing your customers to reach 90+ days, as this indicates a high risk of non-collection. If this report is inaccurate, the income on your P&L report will be inaccurate, which can snowball into an inaccurate profit percentage.

The other report that feeds the Profit & Loss statement is the Accounts Payable (A/P) report. This report shows how much money your business owes to vendors or suppliers for goods and services you’ve already received but haven’t yet paid for because it was purchased on credit.

This is essentially the opposite of an accounts receivable statement because it shows what you owe and not what is owed to you. The report is broken out by the same categories as the A/R statement, to demonstrate how aged a bill is. The A/P report helps you maintain strong vendor relationships and avoid late fees.

It also lets you manage your cash flow and see what’s due soon. Auditors and Lenders use this report to assess short-term liabilities and determine if you have healthy payment habits.

Profit & Loss Statement

      The Profit & Loss Report, also referred to as the Income Statement, will be the main report to find the profitability of your business. The A/P and A/R report feed into this, along with overhead expenses, interest spent, interest earned, and any other miscellaneous expenses.

Using this report allows you to make any necessary adjustments if your payroll/labor metrics are too high or if your material metrics are high, indicating a price increase. The P&L report provides easy visibility into where your business is spending if your bookkeeping is consistently organized each month.

The report is also the largest one that determines your tax liability, and having it will help your accountant or tax professional, hopefully Waterford Business, plan and calculate the business’s taxes at the end of the year. But also, provide you with estimated tax payments throughout the year to stay compliant with IRS standards. It is helpful to you to understand how this statement benefits you. Here is a link to learn more about the meaning, importance, types, and examples of the P&L statement.

Balance Sheet Statement

      This report is not a standalone, nor is the P&L Report. Only having the Income statement prepared, not the balance sheet, is like trying to sit on a three-legged stool with two broken legs and balance on it. The Balance Sheet also feeds into the P&L report, and we want to make sure we’re using both the Balance Sheet and the Statement of Cash Flows, since they’re interconnected.

Here is where we can see the Accounts Receivable number. As we talked about previously, if the A/R isn’t accurate, it won’t be correct on the Balance Sheet, and it won’t present correct income metrics to the P&L.

Along with the A/R for this statement, it will list your liabilities, the loans you owe, and how much is left. If the loan balances aren’t correct, that means we don’t have the interest expenses correct on your profit and loss statement.

Credit cards will also be listed on this report. If the amounts due on those are not showing correctly, then we don’t have all the expenses recorded on the books or on the P&L.

Assets are also listed, including fixed assets such as vehicles, machinery, computers, and equipment, as well as liquid assets and your bank accounts.

With this statement, you can see how much debt you owe and whether you have enough to cover it. If your business does not have enough assets or enough in the bank accounts to cover that, then you could default on a loan, or you’d have to take out another loan.

Often, business owners use this report to decide whether they can take on another loan with a better interest rate and terms to pay off and bundle the individual vehicle loans. As you can see, it’s imperative to understand what a Balance Sheet can tell you, but this link provides an explanation, components, and examples of the Balance Sheet.

Cash Flow Statement

      Lastly, the statement of cash flows is a report that combines the P&L and Balance Sheet to show you where your money is going. It shows you how much you made in sales and how much you didn’t collect (the Aging A/R metric), the amount paid towards liabilities, and how many new liabilities were created.

This is an account that is crucial to understand at the end of the month or the end of a period you’re looking at. It tells you how much free cash you have, and if it’s consistently showing negative, that’s a bad sign. It indicates poor business performance. However, if it’s consistently showing positive results, this tells you the business is gaining equity and assets and growing traction.

Wrapping up Financial Statements

Wow, that was a lot of information to unpack, and we didn’t even get into it as in-depth as we could have. Always keep your bookkeeping organized so you have accurate A/R, A/P, P&L, Balance Sheet, and Cash Flow reports. Keeping these reports as accurate as possible will help you make better decisions to ensure your business is successful and avoid legal or tax issues.

If you want to continue this conversation or ask more questions, feel free to contact us. In the meantime, check out our other blogs and videos on YouTube.