Financial reports: the 3 most important in the UK

When trading in the UK, banks, third party lenders and investors will expect your financial reports to be up to date and in accordance with UK GAAP (generally accepted accounting practice). This is for both for internal management financial reports and external financial reports.

Regularly reviewing your financial reports will also help you assess and improve current performance, avoid risk, and make scalable plans for future growth. To protect your company’s financial health, secure investment and/or lending, understanding these three financial reports are key.

1. Cash flow statement

The cash flow statement is arguably the most important financial report for small businesses. More than 68% of all small business owners are concerned of losing business due to the shortage of accessible cash.

By accurately revealing where you’ve assigned your cash and if you are likely to run out of it, it can help you evade dangerous pitfalls. Regular checks of your cash flow statement can help calculate and avoid a ‘cash crunch’.

Such checks include:

  • The financial incomings and outgoings for operational activities, investments (e.g., office equipment), and financing (e.g. loan repayments).
  • Is your net operating cash flow less than your profits after tax (i.e., are you spending more than you earn).
  • Monitoring the months where cash is lower or higher and ensuring action that ensures continuous ‘cash on hand’.

2. Profit and loss statement

Your profit and loss statement (also called an income statement) reviews the costs, revenue, and expenses your business has experienced over a particular period, whether that be a month, fiscal quarter or year. It can be used to calculate key metrics, including: operating profit margin, gross profit margin and operating ratio.

To achieve a precise overview of your financial performance, the profit and loss statement can be evaluated by the following three indicators:

  1. Your revenue (known as the ‘top line’).
  2. The total costs, such as operating expenses, research and product development, and expenses associated with taxes and interest.
  3. Your net income (known ‘bottom line’), which is what remains when the costs of doing business are deducted from your revenue (or ‘top line’).

3. Balance sheet

The third vital financial report is the balance sheet. The balance sheet summarises what your business owns (assets), what your business owes (liabilities) and the existing value of your business to investors (shareholder equity).

In straightforward terms, the assets you own must balance out alongside the money you have borrowed.

Your assets could include:

  • Cash in your bank account
  • Short-term investments
  • Accounts receivable
  • Equipment and property

Your liabilities could include:

  • A bank line of credit
  • Accounts payable
  • Wages payable
  • Rent, utilities and tax

Together, the cash flow, profit and loss statements and the balance sheet financial reports provide essential understanding into your company’s operations and total performance.

If you understand your business’ key financial data, it allows you to make more informed decision-making and therefore more sustainable growth for your business.

Bonus tip:

Get in touch and speak to someone from our Business Services Team on 01903 234094 at Carpenter Box. Our team will be happy to walk you through each financial report, so you’ll feel comfortable evaluating them independently on a frequent basis.