One of the most common questions we get asked is “Am I making enough money” or to put it another way “How much profit should I be making”. This video shares a simple but powerful process to assess the financial performance of your business.
So what is the financial performance of your business? Financial performance is a general measure of a company’s financial health over a period of time and can be used as a benchmark to compare your firm with other similar firms in your industry as well as to compare different industries. Three different financial reports are used to measure your financial performance and these include the balance sheet, the profit and loss statement and the cashflow statement.
Balance Sheet
I liken the balance sheet to a photograph – it’s a snapshot of your business and typically measures your firm’s assets and liabilities and how well these are being managed.
Profit and Loss Statement
The profit and loss statement is more like a video as it tells a story over a longer period of time, typically one financial year. It provides a summary of operations and measures sales against expenses with net income being the net result.
Cash Flow Statement
The cash flow statement is a combination of both the profit and loss statement and the balance sheet and provides the source and uses of cash flow from operations, investing and financing.
Measuring the right financial metrics is essential for your business because they can provide important insights into how well your business is doing in comparison to other business as well as allow you to make informed decisions to maximise your growth into the future. If you want to keep your business on track, you simply cannot ignore the process of developing financial metrics for monitoring your progress.