Updated: Apr 25, 2018
It's really helpful to be able to run some reports which help you truly understand your business's figures. So, what are the key business reports and what can they tell you about your business?
The two reports I'm going to tell you about are the Profit & Loss Report (also known as an Income Statement) and the Balance Sheet. These are key business reports, they're the reports you'll see if you ever open the annual report and accounts for a large business, and they're reports you'll file with Companies House at the end of the year if you're a limited company. Just these two reports can give you some really good insight into how your business is doing.
Profit & Loss Report (Income Statement)
This report is about your business's profit. It tells you the value of your sales and expenditure, and the profit the business made. This report is usually run for a full financial year at the year end, but there's no reason why you can't run one which covers the period you're interested in understanding whether it's the last financial year, the year to date, last month, this month, this quarter, this week...
The precise layout and wording will depend on your accounting system and you might have different headings and sub totals, but this is the information you'd expect to see on your Profit & Loss Report.
OK, this is the obvious one, the first figure you'll see on the report will be the value of your sales in the period.
Cost of sales
These are the costs directly associated with making those sales. It could include things like materials and costs of staff who are employed purely to manufacture a product.
These are all the business's other costs, IT expenses, rent, marketing, web hosting, phone lines and so on. Overheads are costs which can't be directly linked to a specific sale.
There are two profit figures you'll see on the report. The business's gross profit, which is calculated as sales minus cost of sales. And net profit, which is sales minus cost of sales and overheads. Gross profit tells you how profitable the products are which the business is selling, and net profit shows you overall, and after all other costs, how profitable the business is.
This report gives you a snapshot of your business's financial position on one specific day. It's usually run on the last day of the financial year, but you might want to run it to coincide with the last day of the period you're running a Profit & Loss Report for to give you a full view of your business.
A Balance Sheet shows you what the business owns and what it owes at a point in time. It can be considered as one way of reviewing the financial health of the business because it shows overall whether the business (and therefore the owners of the business) owns assets, or owes money to others. Here's the key information you'd expect to see on your Balance Sheet.
These are items owned by the business which will be kept for a long time like machines and buildings.
These are items owned by the business which will be kept for a short amount of time. It includes things like cash in the business's bank account, amounts owed to the business by customers (because soon these will be cash in the business's bank account too), and stock.
These are items the business owes which will be paid for in a short amount of time (usually less than one year). It includes things like a bank overdraft and amounts owed to suppliers for invoices which haven't been paid yet.
These are items the business owes which will take a long time to pay off, such as bank loans.Net Assets
By adding up all the assets of the business and taking away the liabilities, you can see the Net Assets or Net Liabilities of the business. Let's say your business has net assets of £10,000. This simply means the business owns £10,000 more "stuff" than it owes. You can also say that £10,000 is the value of capital and reserves that has been built up in the business. You could say the Net Assets belong to the shareholders or owners of the business and are a reflection of what their investment in the business is worth, but there are many ways of valuing a business, and that's a story for another day.