*Does profit prove the performance of a business?
When a company is doing well, it is evident because it gets plenty of sales. Therefore, it is common for business owners to think that my business is doing well because they have good deals, and I get a lot of cash coming into the business.
Unfortunately, they fail to consider the accounting view in the business; when a company does not maintain a proper accounting system, they are not aware of the financial health of their business. To conclude that their business is doing well, preparing the necessary financial statements to finish that decision is vital.
Further, they need to maintain cash flow and budget to check the incomings and outgoings cash in the business. Cash flow is one of the required methods to review the daily income and expenses in the industry. If the business is growing fast, it might not be possible to check daily, but a weekly check is crucial to saving the company from losing money.
The budget you set every year depends on the prior-year figures. If it is a start-up, make the assumptions to arrive at the figures depending on the market for the product, and then regular checks with actuals give you the natural position of your finances. When you end up with a negative budget, analyze and amend the budget to match the actuals. Also, take action to cut down on your unnecessary expenses.
What are the financial statements, and how often to prepare
Prepare your profit and loss accounts annually to arrive at the profit. Also, the balance sheet goes with that to prepare. A profit and loss account considers the annual sales and expenses incurred during a financial period. If you sell goods on credit, the sales made but not received the cash are the receivables for the year. Then buying goods for your production but not paying for it in total are also considered as payables when calculating the profit, the financial statement showing your profit. Besides, the payables and receivables will go on to the balance showing as debtors and creditors for the financial year.
It is the document the funders, lenders, and the bank get when considering a loan for your business. Further, the stakeholders and investors will want to see your financial statements when joining your company.
It is essential to understand the performance of the business as it can change at any time depending on the following:
- Changes in revenue
- Changes in costs
- Gross profit
- Net profit
- Gross profit margin
- Net profit margin
The company accounts have all the information in its reports if anyone requires analysis to determine the organization’s health. Using this information to compare with other businesses will not be ideal because of the difference in the financial periods. It is because different companies have different accounting periods and even economic policies.
Even when analyzing multiple sources of information from the same business, it is possible to interpret the company’s performance differently, depending on how they use it.
- Net profit margin