When a new client approaches you for help organising their business’s finances, you’ll need to look at a number of things to fully understand their current situation.
The main documents you’ll need to see to provide a clear picture are their financial statements. These will cover all of the income and expenditure for your clients’ trading periods.
Here are the things you need to look for when onboarding a new client.
What financial statements will you need?
You should expect three main financial statements from a client that will paint the overall picture of their business’s health, the first of which is a balance sheet, which will give you insight into the business’s assets, liabilities and shareholder equity.
Secondly, there are profit and loss (P&L) statements. These will show the total revenue and expenses and give an overall gross profit.
The business’s cashflow statement is similar to the P&L, but rather than showing the profit made, it keeps track of money coming and going through the business, including investments.
These documents are vital when measuring a business’s financial wealth.
Measuring a business using financial statements
If you have a potential client approach you for help with their business, you can use their balance sheet to see how they are spending the business’s money.
The two types of assets listed in the balance sheet will be the fixed assets, such as land and vehicles, and the current assets, such as stock items and petty cash.
You’ll also have to look at the business’s liabilities. Long-term liabilities are debts which will not need to be repaid within the next year, while current liabilities are debts with deadlines within a year.
With an overall picture of the assets and liabilities, you can see if the business owns more than it owes, which is a good indicator of its financial position.
Next, you’ll want to analyse the business’s P&L. This will take into account the total revenue and expenses for the business. First, find the turnover figure and deduct the cost of sales, to get the business’s gross profit.
You’ll also find earnings before interest, tax and depreciation in the P&L. Other administrative expenses like rent and utilities are deducted from the gross profit to leave you with a net amount.
To fully analyse your client’s cashflow statement, you’ll need to look at its three main areas. The first is the cashflow from operations, including selling inventory and supplies and employee salaries.
Secondly, there’s cashflow from investing, such as money spent for future operations. While it’s encouraging to see a business planning ahead, priority should be given to a business’s short-term cashflow.
Lastly, you’ll need to check over cashflow from financing. This measures a business’s cashflow between itself and its creditors.
This is an incredibly important part of the cashflow statement as you’ll need to ensure your client is paying back its debts on time and not defaulting on any payments.
If this figure is positive, it means more money is coming into the business than going out.
If you need any help
When dealing with new clients, it can always be helpful to talk to a firm with experience dealing with financial statements.
Contact us today to find out how we can help.