Financial management
Good financial management is essential in the building industry, no matter how big or small your business.
It is important to take a ‘hands-on’ approach to financial management, and not leave it to your bookkeeper or accountant. While your bookkeeper or an accountant can set up systems and produce reports, as the owner of the business you must be able to read and interpret them, and you should understand how your decisions impact on the financial condition of your business.
Managing your cash is vital to ensuring a secure future, both for you and your business. Without proper financial planning and monitoring, your business is unlikely to be successful.
In order to maintain a viable business you need to have access to key financial information to help you estimate and forecast current and future cash flow, as well as control expenditure.
A brief summary of some of the key reports you should be using in your business is provided below.
Cash flow forecast
Cash flow is the money that comes in and out of your business. So, a cash flow forecast shows where cash comes from and where cash goes. It can help you determine if you will have enough cash to meet your debts as they fall due. Predicting your cash flow in advance helps you to diagnose and plan for problems – before they happen.
You should forecast your cash flow on a monthly basis for at least a year out. Importantly, whatever the length of projection, it must allow you to predict shortfalls in your cash flow and give you enough time to take corrective action.
Download a sample cash flow forecast.
Profit & loss statement
A profit and loss statement is a summary of the financial performance of a business. It summarises the income and subtracts the expenses incurred over a defined period (usually over a month, quarter or year) to calculate if the business made a profit or a loss for that period.
The profit and loss statement is different from the cash flow forecast in that it takes into account more than just cash, things like depreciation. Additionally, a profit and loss report is based on accrual accounting – that is when income and expenses are incurred, not when cash is exchanged.
Download a sample profit and loss statement.
Balance sheet
The balance sheet is a summary of a business’s assets (what the business owns) and liabilities (what the business owes) at a specific point in time. The difference between the assets and liabilities is known as the owner’s equity.
Download a sample balance sheet.
