At some point, after hanging the shingle up and opening for business, most entrepreneurs hire someone to help with their bookkeeping. Whether a family member, friend, or clerk, we pay our bills, send out invoices, and make deposits in the bank.
However, since the person hired to help isn’t an accountant, very few actually have accurate, timely financial statements produced on a monthly basis. And those that may, don’t look at them or know what they mean really.
In a best-case scenario, you should understand how the business you are going to open should look financially. Depending on your industry, your financials will vary. And, if you do not know the inherent financial risks, or opportunities, in your industry, major problems can arise.
Here are some common situations:
- No time to invoice. Business is great. We are busier than ever. We are doing the work and I am paying my people and vendors, but I don’t have time to invoice the customers. It is never straightforward, so no one else can do it but me.
- Customers are not paying us on time. We are busy. We did the work. We even invoiced. But we haven’t been paid. Our client/customer says that their client/customer hasn’t paid. What? It is how our industry does it. Meanwhile, if your customer hasn’t paid you, how do you pay your employees and vendors?
- Couldn’t tell which funds were for projects, which for overhead. Your industry requires project-based loans to fund the work, and when the project is done, you are able to bill the customer, or close on the project, and pay off the loan. The problem is that with poor accounting and reporting, you are not sure which funds are for projects and which are available for overhead. It seems like there is a lot of cash, so you spend ….but then realize you don’t have enough to finish the projects.
- Didn’t know you had a gross profit problem. You are doing a lot of work and selling everything you finish, yet for all of your hard work, the profits are minimal. You cut office staff thinking your overhead is too high. Now you are making some money, but you are working a million hours. You have never seen a margin report and didn’t realize that the problem was your gross profit, not your overhead.
These are just a few but represent a large number of small business owners who are working really, really hard, yet don’t seem to get ahead financially….or maybe even shut down.
Foundational Steps To Creating and Using Good Financial Reporting
And, sadly, they don’t even know that accurate financial reports and understanding could have provided the information they needed early on to course correct.
There is so much to be written about financial information for business that a blog post can’t do it justice, however, the bottom-line best advice for small businesses is:
- Commit time or resources to create and keep up accurate and timely financial reporting.
- Hire someone qualified in accounting internally, or outsource, to ensure that you are following Generally Accepted Accounting Principles (GAAP).
- Learn the key performance indicators for your business. For example, for restaurants, it is food cost and labor %. For construction, it is gross margins and cash flow.
- Require, and review regularly, monthly financial statements within 2-3 weeks of the next month.
- Focus on what the numbers tell you about operations so you can make changes to improve financial performance.
- Balance Sheets tell us a lot. Review and understand your balance sheet, as well as your profit and loss statement, especially if you are in a capital-intensive business. This is where you see if you have money in the bank if your customers are paying you timely, if you have too much debt, etc.
- Get someone to help you understand what your financial statements are saying about the health of your business and how this information can make important decisions easier to make I.e. CPA, financial analyst, business coach or consultant.
When I start working with a new business client, some of the first questions are:
- Do you have an in-house accountant?
- Do you have accurate and timely financial statements?
- Do you review them and understand what drives your business?
Just seeing someone’s financial statements can tell me more about their business in a few minutes than hours of coaching and consulting.
Accounting seems boring and tedious.
But, in the end, financial management reports for your business is like having a GPS or map to an unknown place. You are going to actually get there, and it will be much faster than just trying to find your way.