Once tax time has passed, many small business owners breathe a sigh of relief and move on. But the start of a new financial year is actually one of the best times to pause, review your numbers, and ask: what did last year really show us?
Your accountant may have prepared your tax return, but your financial reports can tell a much bigger story. A basic understanding of your Profit and Loss Statement, Balance Sheet and supporting records can help you make better decisions around cash flow, pricing, tax planning, debt, growth and business structure.
Your Profit and Loss Statement, or P&L, shows your income, expenses and profit over a period of time. It helps identify whether your business is growing, shrinking, or simply working harder for the same result. The ATO explains that business taxable income is generally worked out by starting with business profit or loss, then applying relevant tax adjustments.
When reviewing your P&L, do not just look at the final profit figure. Look closely at your gross profit margin. This is the difference between your sales and the direct cost of delivering your product or service. If sales increased but gross profit fell, your costs may be rising, your pricing may be too low, or discounts may be eating into your margin.
Next, look at your overheads. These include rent, wages, insurance, software, marketing, subscriptions, vehicle costs, interest and professional fees. Ask whether each expense is necessary, whether it helped generate income, and whether it is likely to increase again this year. A business can grow revenue but still go backwards if overheads rise faster than income.
You should also compare the current year against the previous year. Which income streams grew? Which expenses increased unexpectedly? Were there one-off costs that distorted the result? Are there seasonal patterns you should plan for? Your P&L should help you understand not only how much profit you made, but how reliable that profit is.
Your Balance Sheet shows what your business owns and owes at a point in time. This includes bank accounts, stock, equipment, vehicles, unpaid invoices, loans, credit cards, tax debts, superannuation obligations and owner’s equity.
Start by reviewing your cash position. Did the business finish the year with enough cash to meet upcoming bills? If profit looks healthy but cash is tight, you may have money tied up in stock, unpaid invoices or loan repayments.
Then review your debtors, which are customers who owe you money. A growing debtor balance can be a warning sign. Sales are only useful if they turn into cash. Look at how long invoices are taking to be paid and whether stronger payment terms are needed.
Also review your liabilities. This includes GST, PAYG withholding, income tax, superannuation, loans and supplier bills. BAS reporting can include GST and PAYG amounts, depending on your business circumstances. If these amounts are building up, your business may need better cash flow planning.
Other useful documents include bank statements, BAS records, payroll reports, superannuation records, loan statements, stock records, asset registers and aged payables reports. The ATO states that businesses are legally required to keep records of transactions relating to tax, superannuation and registration affairs.
Once you understand the basics, ask your accountant these five questions:
- What did last year’s profit really tell us?
Was the result strong, weak, inflated by one-off income, or reduced by unusual expenses? - Are my margins where they should be?
Should I review pricing, supplier costs, wages, discounts or service delivery? - Is my cash flow strong enough for the year ahead?
Ask whether tax, BAS, super, loan repayments and slower trading periods have been properly planned for. - Are there any warning signs on my Balance Sheet?
This may include rising debt, unpaid invoices, old stock, tax liabilities or low working capital. - What should I change this financial year?
This could include better bookkeeping, tax planning, budgeting, business structure, asset purchases, debt reduction or improved reporting.
The new financial year is more than a fresh start. It is an opportunity to use last year’s numbers as a guide for better decisions. With the right advice, your reports can become a roadmap for stronger cash flow, better planning and a healthier business.
If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.
This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.
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