Understanding 'financial systems' Toolkit
Your step-by-step guide to understanding and using financial statements in your business.
Understanding financial statements is vital to good business planning and decision making. Knowing how to read a financial statement, use it to monitor the performance of your business and assess your business decisions can feel overwhelming and time-consuming, especially when there is so much going on outside the office! It’s important to understand a:
- Profit and loss statement
- Balance sheet
- Cashflow statement
- Business plan
We’ve created this simple toolkit to provide you with a step-by-step guide to understanding and using these financial statements in your business. It’s been tailor made for young farmers and fishers, so you know it’ll apply to what’s happening on your farm or boat!
Profit & Loss Statement
A profit and loss statement details your business’ income and expenses, including both variable and fixed expenses, over the course of a financial year. Variable expenses change from year to year; for example, seed, fertiliser, contractors and/or freight. Fixed expenses generally don’t change as much. They remain constant throughout a specific period, for example, rates, insurance, utilities and wages for permanent staff. The information contained within a profit and loss statement can be used to calculate ratios to analyse the financial performance of your business.
A balance sheet provides a record of your business' assets and liabilities or debts at a given point in time. Assets include things like land, livestock and machinery. They're broken down into two classes – current assets, which can be easily sold or liquidated, and non-current assets, which are assets you don’t intend to sell in the short term. Liabilities are the debts owed by the business and are also broken down into current liabilities and non-current liabilities. The main purpose of a balance sheet is to measure the net worth or equity your business, which is the difference between the total assets and the total liabilities. It’s a key indicator of the financial health of your business.
A cashflow statement is used to predict your business’ monthly income and expenditure over the course of one or two years. It will be of most benefit to your business when it involves two steps:
(1) an estimate of your business' monthly income followed by
(2) recording the actual amount of income your business generated against these estimated figures.
By monitoring cash flow on a monthly basis and comparing estimated versus actual figures, you can make decisions proactively to ensure your business has enough working capital to cover your expenses.
A business plan should outline where your business is now, where you want it to go and how you’re going to get it there. Business planning should include consideration of production, marketing, people and resources. It should also be correlated to the financial analysis you’ve done using your Profit & Loss Statement, Balance Sheet and Cashflow Statement. Writing these things down and sharing them with your family members or business partners, can give your business direction and help you achieve your goals. It should be a living document that changes as your situation changes, rather than locking you into following a certain path.