In this article I’ll explain why maintaining accurate and up to date business accounts is more than just a necessary chore.
For many small business owners, maintaining financial records takes second place to generating new business, providing goods or services to clients, and all the ongoing challenges of running a business.
Subsequent articles in this series will detail key financial reports such as profit and loss (P&L) statements, balance sheets and cash flow forecasts, and I’ll explain how and when to use them.
Why are you in business?
The overwhelming majority of us need to generate a return from our businesses that provide us with enough money to: pay the rent or mortgage, feed and clothe the kids, indulge in luxuries like holidays, and put aside enough to retire on. We also need to be able to pay our business debts when they’re due.
So how can your financial reports help to achieve these goals?
To survive and prosper, any small business must generate both a profit and surplus cash. Keeping your accounts up to date, and monitoring your financial reports regularly can help you do both.
Want more articles like this? Check out the financial management section.
Understand where your profit is coming from – and where it’s going.
In the long term, the return from your business will almost always come from selling your goods or services for more than it costs you to provide them.
However, for most businesses this isn’t uniform. You probably have some products or services that are more profitable than others, and you may have some customers who are more profitable for you than others. It may also be that some parts of your business make a profit that’s used in part to subsidise other loss-making areas of the business.
The only way for you to identify what’s going on here is to run P&L reports for the business as a whole, and if necessary, for individual products, services, customers or whatever other basis is relevant to your business.
Manage your cash flow in good times and bad
In addition to making a profit, your business also needs to generate enough cash to pay your suppliers, employees, the ATO and so on.
It’s possible for a business to be trading profitably but still have insufficient cash to operate due to poor cash flow management – for example, having too much cash tied up in debtors or stock, or in the purchase of fixed assets.
Conversely, it’s possible to be trading at a loss and yet (at least in the short term) have surplus funds.
Either way, you can’t judge the true health of your business simply by looking at the balance on your bank statement. Instead, running a Cash Summary report will give you an accurate picture of cash in and out of your business. If you also create a budget or forecast you’ll be able to foresee and address any cash flow issues ahead of time.
The most useful reports are those that are up to date
Your financial reports are one of the few sources of information you have that no one else can access. Used wisely they can provide a genuine advantage over your competitors. Unfortunately though, many business owners can’t access these benefits because they either don’t run financial reports at all, or they generate reports containing data that is out of date and consequently of little value.
Do you use financial reports to help manage your business? And if so, which reports do you find the most valuable?