Professional services businesses provide expert advice, solutions, and services to their client partners. A few types of companies that fall under professional services are law firms, consulting firms, accounting firms, engineering firms, and more. While providing excellent services is their primary goal, managing the financial health of their business is equally important if they want to stay competitive and sustainable. On-demand access to accurate financial reports are essential to business executives in order to make informed decisions and ensure the business is profitable.
In this blog post, we will discuss the three must-have on-demand financial reports for professional services business leaders as well as what it means to have finairo as your trusted financial operations partner.
An income statement, also known as a profit and loss statement, is a financial report that summarizes a company's revenues, costs, and expenses over a specific period, typically a month or a year. The income statement provides a snapshot of the business's financial performance and helps business owners understand whether the business is profitable or not.
For professional services businesses, the income statement typically includes revenues from client fees, salaries and wages paid to employees, overhead costs such as rent and utilities, and other expenses related to running the business. The income statement can help executives identify areas where expenses can be reduced and areas that can drive revenue.
An income statement also provides the information that is needed to calculate important financial ratios, such as the gross profit margin and the net profit margin. The gross profit margin is calculated by subtracting the cost of goods sold from the revenues and dividing the result by the revenues. The net profit margin is calculated by subtracting all expenses, including taxes, from the revenues and dividing the result by the revenues. These ratios can help business leaders understand the profitability of their firm and make decisions around pricing, expenses, and investments.
2. Balance Sheet
A balance sheet is a financial report that provides an insight into a company's financial position at a specific point in time, typically at the end of a month, quarter, or year. It summarizes the business's assets, liabilities, and equity. Assets are anything that the business owns, such as cash, accounts receivable, equipment, and property. Liabilities are any debts or obligations that the business owes, such as loans, accounts payable, and taxes. Equity is the value of the business that belongs to the owners or shareholders.
For professional services businesses, the balance sheet typically includes assets such as accounts receivable, cash, and equipment. Liabilities are typically loans and accounts payable, and equity is made up by retained earnings and capital contributions. The balance sheet helps understand the financial health of a business and the level of risk associated with its operations.
The balance sheet reserves as a baseline when calculating debt-to-equity ratio and the current ratio. In order to calculate the debt-to-equity ratio you need to divide total liabilities by the total equity. The current ratio is calculated by dividing the current assets by the current liabilities. These ratios are used to understand the business's ability to pay its debts and meet its financial obligations.
3. Cash Flow Statement
A cash flow statement is a financial report that shows how cash is coming into and going out of a business over a specific period, usually a monthly or yearly. The cash flow statement helps business executives understand how the firm's operations, investments, and financing activities impact their cash position.
For professional services businesses, the cash flow statement typically includes cash inflows from client fees, interest, and investments. On the other hand, the cash outflows are salaries and wages, overhead costs, taxes, and investments in equipment or other assets. The cash flow statement helps the decision makers understand the business's ability to generate cash and manage its cash flow. Essential financial metrics linked to the cash flow statement are operating cash flow ratio and the cash conversion cycle. The operating cash flow ratio is calculated by dividing the operating cash flow by the total current liabilities. The cash conversion cycle is calculated by adding the days inventory outstanding to the days sales outstanding and subtracting the days payable outstanding. These ratios can help business owners understand the efficiency of their cash management and identify areas where improvements can be made.
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In summary, professional services business leaders must have access to on-demand and accurate financial reports to manage their operations effectively. The income statement, balance sheet, and cash flow statement are the three must-have financial reports and our cloud-based webapp can deliver them to you daily, allowing you to make informed decisions to ensure your profitability.
Request a consultation to learn more about how finairo's outsourced financial operations can empower your firm to greater financial performance and operating efficiency.
