While there are so many benefits of preparing an accurate and timely financial reports, we have identified few key benefits of financial statements. They are stated below:
1. HELPS TO UNDERSTAND THE FINANCIAL STATUS OF YOUR BUSINESS
The complete financial standing of your business can be presented in a quality and timely financial statement. There are three main financial statements, they are;
- The balance sheet
- The income statement
- The cash flow statement.
The balance sheet shows the equity of the owner(s) after the liabilities are deducted from the assets.
The income statement is popularly known as the profit and loss statement, and it shows the profit derived from income over a given period of time usually one year.
A cash flow statement is very important in any business, it is a valuable tool which shows if there is enough cash coming into the company to pay for the operations of the business.
The Income Statement of a restaurant and hotel shows how they perform over a period of time (i.e. a week, month or year). All restaurant and hotel expenses are taken into account, from prepaid expenses to postpaid expenses. The Income Statement tells the management if the business is making a profit or not. Then the management can review and start changing policy and carrying out strategies that will aid the restaurant achieve its goals of making more profit and probably expanding. Some of the key questions that need to be addressed are; Should new sales programs be implemented? Does food cost in line with menu prices? Is the restaurant hitting its budgets? Can the owner(s) make distributions to the partners?
The simple formula for calculating Income Statement is:
Sales - Cost of Goods Sold - Expenses = Net Profit/Loss
The net profit or loss is the real profit/loss of the business because it gives the exact profit or loss after expenses incurred have been deducted.
The Income Statement is very important financial statement to review because it reveals the nature of the success of the restaurants and hotel.
The financial statements of restaurant and hotel should be broken down into the following categories:
• Sales/room revenue
• Employee Benefits
• General and Administrative
• Other Income
If sales and expenses of the business are broken down into specific categories, the manager can easily compare and analyze the restaurant and hotel to industry standard percentages. Timely financial reporting will help to control the cost of goods sold like beverage cost food cost.
The state of health of a restaurant and hotel can be analyzed from the Balance Sheet at any point in time. The Balance Sheet allows business managers to forecast short and long-term cash flow.
As important as it is to review the Balance Sheet, few restaurants ever bother to prepare it. By checking the accuracy of the Balance Sheet, an operator can ensure the accuracy of the Income Statement. The Balance Sheet lists all the assets, liabilities and equity of the restaurant. The formula for calculating the Balance Sheet is:
Assets = Liabilities + Equity
In the simplest definition, assets are what the business owns. They include equipment, motor van, inventory or cash, etc. Liabilities are what the business owes such as vendor bills, loans, creditors, notes, and leases. A gift certificate is a liability to the business because the restaurant owes someone a meal at a future date. Equity is the ownership of the business.
It is important to properly classify assets and liabilities are properly on the Balance Sheet in order to get a clearer picture of the business, a manager should break down the Balance Sheet into subcategories. The breakdown is explained below:
• Current Assets: Also called short term assets, they are assets that don't last for a long time usually less than a year (i.e. cash, credit card receivables, inventory and prepaid expenses).
• Fixed Assets: Also called long term assets, they are assets with a life greater than a year. They are directly used to produce revenue (i.e. equipment, computers, furniture and leasehold improvements).
• Other Assets: assets with a life longer than a year that is not directly involved in the production of revenue (i.e. security deposits, trademarks and artwork).
Liabilities are classified and are broken down as follows:
• Current Liabilities: debts due within one year (i.e. accounts payable, accrued expenses, short-term loans and even gift certificates).
• Long-Term Liabilities: debts due that extend beyond one year (i.e. notes payable or long-term leases).
2. SALES PATTERN
Financial statements reveal the total earnings of the restaurant owner and hoteliers per year in sales. Although the sales may fluctuate from time to time, but financial planners should be able to identify a pattern over years of sales figures. For example, the restaurant owner and hoteliers may have a pattern of increased sales when a new product is released. The sales may drop after a year or so of being on the market. This will benefit the business, as it shows potential and sales patterns so executives know to expect a drop in sales.
3. FINANCIAL STATEMENTS HELPS To PREPARE A BUDGET AND MAKE FINANCIAL DECISIONS
With a well timed financial reporting, you can prepare a budget for your business and take financial decisions which will help to grow the business.
4. IMPROVED FINANCIAL MANAGEMENT
Weaknesses in your financial systems can be examined and corrected through timely financial reporting. Improved financial management allows you to focus on current financial matters and develop future plans.
5. BETTER RESOURCE MANAGEMENT
Due to timely frame financial report the restaurant owners and hoteliers will get accurate numbers of resources, therefore, they can use optimum use of all resources.
6. PERFORMANCE EVALUATION
Business Owners may assess the performance of the Employees in the financial performance of the business under performance evaluation.