Just as a ship requires a compass to point its way to its destination, gauges showing it fuel levels, its stability, and a myriad of other factors, instrumentation that is essentially the ship’s primary information system, so too does a business.
Heading for profitability and longevity over the rough and quirky seas of business require an information system which reports its financial condition and position to the captains and hands in charge. This is the objective of a financial accounting reporting system.
If we think of financial reports as gauges telling us of some critical factors that contribute to the success or failure of our business endeavor, then we immediately understand the purpose of such reports.
A financial accounting reporting system will generate such reports as the balance sheet, the cash flow statement, a trial balance, detailed transaction reports by account, a general ledger report, a transaction journal, a sales tax liability report, and a variety of other reports that give its readers insights into the health and stability of the business ship. For an illustration of a crucial report that comes out of you financial accounting reporting system, lets look at the all important profit and loss report.
Our most critical report is the profit and loss statement. The profit and loss statement, also called the P and L, can be generated on a daily, weekly, monthly or quarterly basis, especially with automated financial accounting reporting instruments. This report goes for the most crucial island your business ship is headed towards, net income.
The P & L report will show you cash income for the period(s) in question, which is the money earned from your sales and services. Of course, that amount is the total income obtained on all sales.
What you sold also has a cost that must be subtracted from the gross sale amount. Your report must show the costs of good sold and sum a total of cost of goods sold (COGS). You are then able to determine your gross profit by subtracting COGS from total income. The result is your business’ gross profit.
But wait a moment. It took more than COGS to sell your product. You had other expenses and the cost of these expenses will further reduce your profits, expenses such as bank service charges, vehicle insurance, and even depreciations.
Then there are the payroll expenses, the payroll tax expenses, professional fees such as lawyers, repairs and maintenance, utilities such as electricity, and vehicle fuel expense. Your financial accounting reporting system will have to accumulate these expenses into a total expense and this too will have to be subtracted from gross profit to derive a net ordinary income.
If you have other income streams and expenses these will have to worked into the calculation, either increasing or decreasing the final amount, the precious net income.
If the net income is anywhere near or below zero, you might imagine your ship is sinking, and if it’s above zero and near or above your business goals, you’re on the right track and should probably keep doing what your doing.
Without an financial accounting reporting system, you’re sailing by the seat of your pants. If you don’t have one, get one now while your ship is still afloat.