Understanding Your Financial Reports:
A Guide for New Zealand Business Owners
Your financial reports tell the story of your business. They show whether you’re making money, where your cash is going and whether your business is becoming more valuable over time.
Unfortunately, many business owners only look at their financial reports at tax time. By then, opportunities to improve profitability or cashflow may already have been missed.
The good news is that you don’t need to be an accountant to understand the basics. Learning how to read a few key reports can help you make better decisions throughout the year.
Download our free Guide to Your Financial Reports for a more detailed explanation of each report, key financial ratios and practical tips for improving business performance.
Download the GuideWhy is it important to understand your financial reports?
Your financial reports provide much more than information for your accountant. They help you answer important questions such as:
- Is my business actually making money?
- Am I charging enough?
- Why is cash always tight?
- Can I afford to hire another employee?
- Is my business becoming more valuable?
- How does this year compare with last year?
Reviewing your reports regularly helps you spot problems early, identify opportunities and make informed decisions rather than relying on instinct alone.
The three financial reports every business owner should understand
1. Profit and Loss Statement
Your Profit and Loss Statement (also called an Income Statement) measures how profitable your business has been over a period of time.
It summarises:
- Sales or income
- Cost of sales
- Operating expenses
- Net profit
A profitable business isn’t necessarily one with the highest sales. Often, improving margins or controlling expenses has a much greater impact on your bottom line.
If your profit is declining, it’s worth reviewing pricing, direct costs and overhead expenses before simply trying to increase sales.
2. Trading Account (Gross Profit)
For businesses selling products or completing jobs, the Trading Account focuses on one important number: Gross Profit.
This measures what’s left after the direct costs of producing your product or service have been deducted from sales.
Monitoring your Gross Profit helps you determine whether:
- Pricing is keeping up with rising costs
- Jobs are profitable
- Certain products or services perform better than others
- Margins are improving or slipping
Even a small improvement in Gross Profit percentage can have a significant impact on overall profitability.
3. Balance Sheet
While many business owners focus on profit, the Balance Sheet shows the overall financial health of your business at a specific point in time.
It includes:
- Cash in the bank
- Money owed by customers
- Stock and business assets
- Loans and other liabilities
- Business equity
A healthy Balance Sheet generally means your business is better equipped to manage unexpected challenges, invest in growth and obtain finance if required.
Profit doesn’t always mean healthy cashflow
One of the biggest surprises for business owners is discovering that a profitable business can still experience cashflow problems.
Common reasons include:
- Customers taking too long to pay
- Excess stock sitting on shelves
- Large loan repayments
- Poor budgeting
- Rapid business growth
Understanding your financial reports alongside your cashflow position provides a much clearer picture of how your business is performing.
*For a more in depth look at this topic, you may also be interested in our article “Why Profitable Businesses Fail”
Which financial numbers should you monitor?
Every business is different, but some of the most useful measures include:
- Gross Profit Margin
- Net Profit Margin
- Current Ratio
- Debtor Days
- Inventory Days
- Debt to Equity Ratio
Rather than focusing on one month’s results, track these figures over time to identify trends and measure improvements.
Make your reports work for you
Financial reports are most valuable when they’re used regularly, not just at year end.
Good habits include:
- Reconciling accounts each month
- Reviewing monthly Profit and Loss reports
- Comparing actual results against your budget
- Tracking key financial ratios
- Looking for trends rather than isolated numbers
These simple practices can help you identify issues before they become expensive problems.
Download our free Guide to Your Financial Reports
This article covers the basics, but there’s much more to learn.
Our free Guide to Your Financial Reports explains:
- How to read each financial report
- The key ratios worth tracking
- Ways to improve profitability
- Practical tips for better financial management
- Common mistakes business owners make
Download the guide today to gain a better understanding of your business finances and start making more informed decisions.
Frequently Asked Questions (FAQs)
What is the most important financial report for a business?
Each report provides different insights. The Profit and Loss Statement shows profitability, while the Balance Sheet shows the overall financial position of the business. Looking at both together gives a more complete picture.
How often should I review my financial reports?
Most businesses should review their key financial reports monthly. This allows you to identify trends early and make timely decisions.
Why is my business profitable but I don’t have cash?
Profit and cashflow are different. Cash can be tied up in unpaid invoices, inventory, loan repayments or business investments, even when your business is making a profit.
* For a more in depth look at this topic, you may also be interested in our article “Why Profitable Businesses Fail”
What is Gross Profit?
Gross Profit is the amount remaining after deducting the direct costs of producing your products or services from your sales. It helps measure how efficiently your business generates income.
Can an accountant help me understand my financial reports?
Yes. An accountant can explain what your reports mean, identify areas for improvement and help you use financial information to make better business decisions rather than simply preparing year-end accounts.
Need help understanding your numbers?
Every business is different and understanding what your reports are telling you can make a significant difference to your profitability and long-term success.
At Drumm Nevatt & Associates, we help business owners understand their financial reports, improve cashflow and use meaningful financial information to make better business decisions.
If you’d like help interpreting your reports or identifying opportunities to improve performance, get in touch with our team today.
