Stop Using Your Financial Statements to Manage Your Small Business
Financial statements are often touted as the best way to understand your business. You review a Balance Sheet and Income Statement each month to know how your business is doing, right? Or maybe you aren’t even doing that. Maybe you simply look at your cash balance on the bank website to understand where you are. Cash is king after all. If you have enough cash then business must be good. While both of these components are important, they offer limited data. You need to see the big picture to really understand your financial story.
Flash reports are essential
Financial statements have their place but are often out of date by the time they are ready for review. They are great for looking backwards and analyzing trends but as you look forward you need real time data. This is where a flash report comes in. Sometimes referred to as a dashboard, this type of report is simply a daily or weekly report that contains key metrics essential to your business. At minimum it should have current cash book balances, year-to-date sales, open accounts receivable and accounts payable balances. You can add in other metrics specific to your business and industry. Taking the next step to compare these metrics to prior periods will give you benchmarks.
You don’t have as much cash as you think you do
I often hear business owners say they manage their cash flow and understand the financial health of their business by looking at their bank accounts every morning. This gives you a false sense of security (or perhaps dread). Your bank doesn’t know what checks you’ve written that haven’t cleared or payments you’ve received from clients that haven’t been deposited. It doesn’t know that you just sold a huge contract with payment coming next week or that you just bought new equipment with payment due in 60 days. This makes your bank balance an unrealistic number. You likely have less cash available than you think you do, especially if you pay your bills with checks or credit cards. Your book balance is a more accurate number as long as you are having it reconciled to your bank balance every month.
Forecasts are key
We can and should learn from the past, but the future is where we are headed. Utilizing the historical data in your financial statements to create forecasts for the near future is a key component of managing your cash flow. For more seasonal industries a 3 to 6 month forecast is reasonable while less seasonal businesses would benefit from a 12 month forecast. This process will help you to anticipate upcoming cash needs. Comparing your forecasts to actual results will help you hone the process for accuracy and see where things may not have gone as planned.
Adding the above components to your repertoire of reporting will assist you with keeping a finger on the pulse of your business, allowing you to strategically plan for success. Need help? We offer business advisory services providing both dashboard reporting and forecasting as well as expert analysis to help you get the most out of your business.
