Directors need to be able to read and understand financial accounts.
If you’re having any difficulty in understanding financial accounts for an organisation of which you’re on a Board or Committee, please don’t hesitate to contact us for a review session on financial accounts for your organisation.
The key financial accounts for all companies include:
Profit and Loss Account
It’s a good idea to ensure management and the accountants have dissected the business so that trading and profit and loss accounts are prepared for individual business operations, not just prepared on an overall consolidated basis.
Accounts prepared on an overall consolidated basis don’t mean anything to individual business managers and, in fact, major problems can be hidden within a consolidated profit and loss account. There’s no problem with lodging the financial accounts for the company’s income tax return on a consolidated basis, however, it’s far better to ensure the monthly financial accounts the management team is using are prepared on an individual business basis, so management is clearly aware of the performance of a particular division. This will then enable the calculation of KPIs that are relevant to a particular division.
Balance Sheet
The business’ balance sheet should be reviewed and analysed and the directors should be able to obtain individual verification of every item in a balance sheet. This means individual items in the balance sheet are able to be supported by another record within the overall accounting system.
For example, the balance in the ledger for sundry debtors should reconcile with the debtors’ aged analysis (i.e. same date that the balance sheet is prepared). The amount shown for sundry creditors in the balance sheet should reconcile with the amount shown for sundry creditors in the creditors’ aged analysis.
Source and Application of Funds
A source and application of funds document prepared each month, for the month and for the year-to-date, will help explain what has happened within the business.
The common comment from many company directors is, “If we made a profit of $100,000 in the month, where is it?”
A source and application of funds document will assist in demystifying what has happened with the various financial balances within the company. Just because the company made a profit doesn’t mean it’s reflected in cash at bank, because that profit may well have been invested into extra stock, amounts owed by debtors, capital expenditure, payment of taxation bill, etc.
Benchmarking
Benchmarking is a very helpful tool, which enables management and directors to compare key components of the company’s financial performance against similar businesses. This is one of the other reasons for not preparing financial accounts on a consolidated, all-in-one basis, but to dissect financial records of the company into individual businesses, so the performance of an individual business can be measured against other businesses.
This relates to items such as gross profit percentage on sales, wages to turnover percentage, average sale per customer, growth in customers, various expenses incurred, percentages of total expenses, etc.
