How AP supports the financial control panel: net income statement, cash flow and balance sheet

  • 22 Apr 2020
  • Finance
How AP supports the financial control panel: net income statement, cash flow and balance sheet Image

Running a company can be compared to racing a car. Regular maintenance keeps the internal engine running smoothly, preparation and practice help the driver push the car to its limits to outpace the other cars on the track without going over the limit and crashing the vehicle. And just like the dashboard panels are essential to the driver, the financial control panel is what guides business leaders to steer their company to a first place position efficiently. 

Three of the critical reports within the financial control panel are the Net Income Statement, cash flow, and the balance sheet. Combined, they create a representation of the financial picture, helping the company with strategic planning and management to earn profits. In today’s global pandemic, finance leaders are heavily relying on these reports to build their business continuity plans. With much of the data feeding the financial picture falling under the roof of the accounts payable department and driven by their reports at month-end closings and on regular intervals, companies are struggling to keep their data up-to-date and real time when employees are working remotely. While accounts payable on an income statement only occurs as an expense, the AP department plays a critical part in the financial control panel. To better recognize the role of AP in the financial control panel, you need to understand the elements that comprise it and the need to establish cloud computing accounts payable to support essential telecommuting. 

What the Net Income Statement Reveals 

The net income statement shows the company’s revenues and expenses quarterly and yearly for the fiscal year. The final report, particularly the final net figure, is incredibly crucial to the investment community. Accounts payable automation makes it easier to keep track of these updates in real time and put the stats at the fingertips of the C-suite. Having the most up-to-date data for these figures is essential, as a net income statement reveals a great deal about the company. 

Currently, in these unprecedented times of global pandemic, businesses are being forced to overcome disruptions and enact continuity plans to secure their cash flow and protect employees. Cloud computing accounts payable technology not only allows finance and AP staff to work remotely, but ensures that the business’ dashboards and reports are not impacted by the shift and can be leveraged to make important organization decisions.  

The income statement details the profits and losses and equity position. Investors expect to see regular updates on these figures. But it’s not just the board members who should be interested in the income statement. Business managers take cues from trends in the income report to understand which times of the year are most profitable and when downtimes exist for future financial planning and strategic supplier payment scheduling. Additionally, they can look at the basic revenue minus expenses to show the profits of the business and determine ways to reduce expenses to boost profits. In the face of a global pandemic, these assessments must be done continually to minimize potential losses. 

The income statement can be a regular health check for the business as a whole. For example, the gross margin, or the revenue minus the cost of goods sold can be calculated as a gross margin percentage and compared to prior percentages period over period. Look for consistency of the gross margin profit, as the COGS should reflect changes in the revenue. Any sudden dramatic changes should be a red flag that there’s an imbalance in the financial health of the company. And with secure cloud computing accounts payable supporting remote workers and making the latest financial data accessible to everyone, finance leaders can rest assured that their actions in face of challenging times and disruption are based on facts and not fear. 

Get to Know the Cash Flow 

The cash flow statement often is one of the most underutilized reports in the financial control panel. Emphasis is often placed mainly on profits, but it’s dangerous to neglect the cash your business is running on. AP plays a key role here, as they are the data compilers that aggregate transactions from all ends of the business. Cash outflows are also tracked, including the cost of business activities and investments during a given period. 

The cash flow statement is updated when transactions occur. Thus, it is important to review the cash flow statement in addition to the net income statement. Updating the activities in both reports in real-time through a streamlined process, such as the ones supported by cloud computing accounts payable, gives everyone confidence in the reports. Any bottlenecks in the AP process make it hard to report on and measure the profitability of the business. Modern automation technology for the accounts payable team streamlines the process and opens a window for an instant and accurate gauge of the flow of cash at any given moment. In a worldwide crisis with no definitive ending, keeping track of cash flow is imperative to determine what other measures must be taken to keep the doors open. 

The cash flow statement consists of segments mapping the cash flows from operations, investing, and financing, each with unique importance. The operational cash flow report can be directly compared to profitability for an instant check on overall financial health and whether your company is making cash through your operations. The section on investing reveals credit arrangements that might be more costly than what was shown in the net income statement. And the cash flows from financing help you better understand the quality of your earnings and how they’re impacting the business. From a higher level, the cash flow statement is a bigger picture indication of your long-term value and liquidity, something you and your investors will want to watch. 

The Balance Sheet and the Bottom Line 

A combination of the company’s assets, liabilities and shareholders’ equity at a given time, the balance sheet is directly tied to the company’s bottom line. Accounts payable appears on the balance sheet under the liabilities, as it represents the short-term debt or money that are owed to suppliers and creditors. Comparing the balance sheet with reports from periods past can give the company a clear portrait of what the company owes and the strength of its financial position. 

The balance sheet alone doesn’t provide a relevant depiction of the business financial status. But when combined with the cash flow statement and net income, it becomes a valuable addition to the financial control panel that investors appreciate. Losses are one area of the balance sheet investors will closely monitor to check a further layer of depth to the earnings from the net income statement. These figures require an extra round of scrutiny, as they may be a subliminal hint of brewing trouble in the company’s financials. In the last five years, some companies have been potentially managing earnings by shifting income-statement losses to the other comprehensive income (OCI) section on the balance sheet. Companies can most certainly expect their balance sheets to undergo extremely close analysis and inspection by investors. 

Altogether, the net income statement combines the balance sheet and cash flow for the “big picture.” With this in mind, accounts payable on the income statement is an actuality. You may not think analyzing profits and earnings reports is as exciting as the Indy 500, but there’s just as much action and risk in the process, and having a reliable dashboard is a necessity. Especially in these trying times, accuracy is crucial, and accounts payable needs to be able to support accurate reporting with instant access to data and real-time updates (whether remote or in office) from the financial transactions of the business. If you’re still using manual processes in AP, you’ll never be able to pull ahead and take the lead. Instead, you’re likely to get stuck in a loop until the friction in your accounts payable process catches up with you in an inevitable crash of inefficiency. 

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